Bank Branching Deregulation Research Articles

Bank capital pressures, loan substitutability, and nonfinancial employment

We exploit the cross-state, cross-time variation in bank tangible capital ratios—brought about by bank branch deregulation on a state-by-state basis—to identify the effects of bank capital pressures on employment and firm dynamics during two waves of changes in bank capital regulation. We show that stronger capital pressures temporarily slowed down growth in employment in industries that depend on external finance, retarding growth in the average size of firms rather than in the number of firms. Such effects were particularly strong for smaller firms that may not have had access to national capital and bank loan markets. Our findings indicate that a tightening of capital requirements may have significant real effects, in part because of the lack of substitutes for bank loans.

Easy Credit as Social Safety Net? How Interest Rate Changes Affect US Social Policies.

Access to credit not only enables people to consume beyond their current income, but also increasingly determines life chances and access to basic social services. This paper argues that there is a trade-off between private credit and the welfare state and proposes a causal model of social policy-making where policymakers incorporate the availability of credit in their considerations of how to distribute welfare resources. Drawing on time-series cross-sectional data from US States I first show that a decline in the share of denied mortgages is associated with lower health care and unemployment expenditures and a modest decline in unemployment insurance generosity. Secondly, I exploit exogenous variation in state-level mortgage interest rates induced by differential timing in bank branch deregulation to demonstrate that improved access to mortgage credit similarly decreases state-level health care and unemployment expenditures and unemployment insurance generosity. The findings of this paper provide causal evidence that easier access to credit lowers state-level public health and unemployment expenditures. These credit flow to families enabled policymakers to shift the burden of social policies from the domain of the publicly financed welfare state into the domain of privately-funded market-driven welfare state. The transition toward a credit-based welfare state has broad socioeconomic consequences. Credit can serve as an alternative form of or substitute for social redistribution and social insurance, but it cannot replace it because the distributional and stratifying implications are not the same as in the case of publicly provided social policies.

The Distributive Impacts of Financial Development: Evidence from Mortgage Markets during US Bank Branch Deregulation

Well-functioning credit markets play a key role in boosting overall economic growth, but their impact on distributional outcomes is much less clear. I use a quasi-experimental setting provided by branch banking deregulation, an important episode of US financial development, to study the distributive impacts of finance. Following removal of geographic restrictions on banks in the 1980s and early 1990s, mortgage access increased for lower-middle income groups, young, and also black households. These effects were driven by commercial banks, the only financial institutions subject to the policy. Banks' new screening technologies may have been responsible for this expansion of credit. (JEL D14, D31, G12, G28)

Stakeholder Corporate Governance: The Combined Effects of Bank Competition and Employment Protection

Between the early-1970s and the mid-1990s, the U.S. banking sector was deregulated and U.S. workers gained more statuary basic protections. The effects of these two reforms on productive activity have largely been studied separately in the finance and labor literatures. Yet they only have separable impacts under classical production theories, abstracting from frictions and the roles of various stakeholders in corporate governance (e.g., related to bargaining between workers, creditors, and shareholders). Jointly estimating effects, we confirm that bank branch deregulation benefits industries highly dependent on external finance. Employment protection promotes knowledge-intensive industries, consistent with labor search theories with firm-specific investment, but not with neo-classical theories and many empirical studies. Importantly, we find interactions between the two reforms to matter for real economic activity, suggesting stakeholder corporate governance to be important.

Bank deregulation and relative wages in finance

Rising wages in the finance industry have been a source of debate and are usually linked to financial deregulations. Exploiting the cross-state and over-time variation in the timing of US bank deregulations, this article investigates the causal impact of each type of deregulation on the relative wages in the finance industry. I document that relative wages in finance began to rise in the early 1980s in almost all states, including those that deregulated before 1970 and those that deregulated in the 1990s. Consistently, after controlling for aggregate macro shocks that affected all states, there is no evidence that relative finance wages increased more following any type of deregulation. If anything, I find a negative impact of bank branching deregulation on relative wages in finance. These results together with those found in the study by Philippon and Reshef (2012) call for a better understanding of the dynamics of wages in the finance industry.

Regulation, Scale, and Growth: Evidence from the United States and India - Dissertation Executive Summary

This dissertation offers insight into the effect of regulation on various aspects of growth and development. Exploiting plausibly exogenous variation generated by deregulatory events, I assess firms’ response to the lifting of size restrictions. In Chapter One, I show that bank branching deregulation increased mortgage lending and home ownership, especially among marginal groups. In Chapter Two, I find that the dismantling of an Indian business regulation constraining investment leads to an increase in firm size, output and productivity.

Financial Deregulation Leads to Economic Growth: Fact or Counterfactual?

We document substantial variation in the effect of state-level bank branching deregulation in the United States on economic growth. We examine the sources of this variation by testing multiple channels that may link deregulation and economic growth. Using a matching method that utilizes synthetic counterfactual states, we find support for the hypothesis that economic growth was associated with states where deregulation solved a capital immobility or “dammed” credit problem. We do not find support for other channels, which posit that banks became more efficient, financed more innovative businesses, or learned by observing prior deregulations.

The Real Effects of Bank Branch Deregulation at Various Stages of Economic Development: The European Experience

This paper provides evidence on the links between financial deregulation and economic performance in a European context. Specifically, we study the relaxation of bank branching restrictions in Spain which triggered off a remarkable inter-regional expansion of savings banks which was coincidental with an unprecedented period of sustained growth. Although related questions have been largely investigated for the US, the European experiences remain largely unexplored. An additional contribution is the use of quantile regression techniques which, unlike traditional OLS regression analysis, do not focus on the “average effect for the average province”. This change of focus helps to overcome the difficulties found by previous studies in identifying any strong link between financial deregulation and growth. We also extend the analysis to other measures of economic activity, not only per capita income but also labor productivity and capital intensity. Our main findings indicate that, should bank inter-regional branch deregulation have any positive effect, the most benefited provinces would be the least developed ones.

Credit Cards, Race and Entrepreneurship

We use the decision by 14 states to remove credit card interest rate caps after the U.S. Supreme Court's 1978 Marquette decision as a natural experiment to explore the impact of credit card availability on black entrepreneurship, which we contrast to the impact of bank branching deregulation. We use Current Population Survey data from 1971-1985 to show that removing state-level credit card interest rate caps increased transitions into self-employment among black individuals. There was no corresponding increase for black individuals following bank branching deregulation. We provide additional evidence that the impact was larger in states with a history of discrimination. Our findings suggest that credit cards were a mechanism that black entrepreneurs used to overcome financial barriers to entry due to discrimination in lending.

Bank mergers, branch networks and economic growth: Theory and evidence from Canada, 1889–1926

This paper incorporates a monopolistically competitive market for deposits a la’ Salop (1979) into an overlapping generations growth model a la’ Diamond (1965). Profit-maximizing banks have incentives to compete for deposits by opening branches or expanding branch networks through mergers and acquisitions. Larger branch networks reduce the transaction cost of financial intermediation and encourage depositors to save more, hence resulting in higher per capita output. Empirically, the development of the Canadian banking industry during 1889–1926, notably the merger wave in the early 1900s, is examined. A VECM shows that savings, real GNP and the number of bank branches, all on a per capita basis, are cointegrated – with long-run savings being a positive function of the other two variables. Results of innovation accounting are also consistent with predictions of the theory. Our findings not only have policy implications for bank branch deregulation as well as mergers and acquisitions but also shed light on the debate about the finance-growth nexus in Canada.

A state-level analysis of the Great Moderation

A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s, i.e., the “Great Moderation.” This paper documents the Great Moderation at the state level, finding significant heterogeneity in the timing and magnitude of states' structural breaks. For example, we find that 14 states had breaks that occurred at least three years before or after the aggregate break, while another 11 states did not experience any statistically important break during the period. Volatility reductions were positively related to the initial level of volatility, durable-goods share, and per capita energy consumption; and negatively related to average firm size, bank-branch deregulation, and increases in the share with a high school diploma. The probability of a state experiencing a break was associated with nondurable-goods share, energy consumption, and demographics. We use these results to examine the plausibility of several explanations of the Great Moderation.

Banks and Labor as Stakeholders: Impact on Economic Performance

Traditionally, the impacts of the rights of financial institutions and workers on corporate performance have been analyzed independently. Yet, theory clearly indicates that the combination of relative powers of different stakeholders affects a firm overall performance. Using U.S. state level and state-industry level data, we investigate how output growth is affected by bank branch deregulation and employment protection occurring over 1972-1993. We find that financial liberalization positively impact overall state growth but greater workers' rights affects it ambiguously. At the industry level, however, employment protection promotes those industries that are more knowledge intensive, while the effect of financial liberalization does not differ across industries that vary in external financing dependency. The results hold controlling for changes in shareholders' rights, which itself is not significant. The findings suggest that financial liberalization operates mostly through an efficiency channel, better reallocating resources across sectors, while employment protection creates higher incentives and encourages more sector-specific, human capital investments. Overall, the results show that the strength of stakeholders' protection affects performance through efficiency channels and provide support for a stakeholders' view of corporate governance.

Banks and Labor As Stakeholders: Impacton Economic Performance

Traditionally, the impacts of the rights of financial institutions and workers on corporate performance have been analyzed independently. Yet, theory clearly indicates that the combination of relative powers of different stakeholders affects a firm overall performance. Using U.S. state level and state-industry level data, we investigate how output growth is affected by bank branch deregulation and employment protection occurring over 1972-1993. We find that financial liberalization positively impact overall state growth but greater workers' rights affects it ambiguously. At the industry level, however, employment protection promotes those industries that are more knowledge intensive, while the effect of financial liberalization does not differ across industries that vary in external financing dependency. The results hold controlling for changes in shareholders' rights, which itself is not significant. The findings suggest that financial liberalization operates mostly through an efficiency channel, better reallocating resources across sectors, while employment protection creates higher incentives and encourages more sector-specific, human capital investments. Overall, the results show that the strength of stakeholders' protection affects performance through efficiency channels and provide support for a stakeholders' view of corporate governance.

Evaluating the real effect of bank branching deregulation: Comparing contiguous counties across US state borders

This paper proposes a new methodology to evaluate the economic effect of state-specific policy changes, using bank-branching deregulations in the US as an example. The new method compares economic performance of pairs of contiguous counties separated by state borders, where on one side restrictions on statewide branching were removed relatively earlier, to create a natural “regression discontinuity” setup. The study uses a total of 285 pairs of contiguous counties along 38 segments of such regulation change borders to estimate treatment effects for 23 separate deregulation events taking place between 1975 and 1990. To distinguish real treatment effects from those created by data-snooping and spatial correlations, fictitious placebo deregulations are randomized (permutated) on another 32 segments of non-event borders to establish empirically a statistical table of critical values for the estimator. The method determines that statistically significant growth accelerations can be established at a > 90% confidence level in five (and none prior to 1985) out of the 23 deregulation events examined. “Hinterland counties” within the still-regulated states, but farther away from the state borders, are used as a second control group to consider and reject the possibility that cross-border spillover of deregulation effects may invalidate the empirical design.

A State-Level Analysis of the Great Moderation

A number of studies have documented a reduction in aggregate macroeconomic volatility beginning in the early 1980s, i.e., the This paper documents the Great Moderation at the state level, finding significant heterogeneity in the timing and magnitude of states' structural breaks. For example, we find that 14 states had breaks that occurred at least three years before or after the aggregate break, while another 11 states did not experience any statistically important break during the period. Volatility reductions were positively related to the initial level of volatility, durable-goods share, and per capita energy consumption; and negatively related to average firm size, bank-branch deregulation, and increases in the share with a high school diploma. The probability of a state experiencing a break was associated with nondurable-goods share, energy consumption, and demographics. We use these results to examine the plausibility of several explanations of the Great Moderation.

CHANGE‐POINT ANALYSIS OF THE GROWTH EFFECTS OF STATE BANKING DEREGULATION

This article uses recent developments in change‐point analysis to demonstrate that stronger income growth rates previously associated with state bank branch deregulation were in all cases temporary rather than permanent. In addition, patterns of temporal ordering across regions suggest that in many states deregulation was a response to economic conditions rather than the reverse. (JEL E44, G28)

Did state bank branching deregulation produce large growth effects?

Previous research claiming large growth effects of deregulation of state bank branching laws is biased by contemporaneous correlation between the regressors and the error term of the regression model. Robustness tests indicate that the growth effect of branching reform is much smaller than initially estimated.