Banking Deregulation Research Articles

Bargaining Power, Banking Deregulation, and Innovation

We show that finance influences innovation by young private firms, an important source of long-term economic growth. We develop a simple theoretical model that predicts that a decrease (increase) in banks' bargaining power vis-a-vis entrepreneurs increases (decreases) both the volume and riskiness of innovation. Using staggered banking deregulation by U.S. states as shocks to the bargaining power of banks, we find that, consistent with our hypotheses, inter-state banking deregulation increased both the level and riskiness of innovation by young private firms while intra-state deregulation decreased them. Further, banking deregulation primarily impacted riskier explorative innovation by young private firms than the less risky exploitative innovation. In contrast, banking deregulation did not affect public firms and mature private firms that are relatively less dependent on bank financing. These results have important policy implications by demonstrating how financial development, through its impact on innovation by young private firms, can have a first order impact on economic growth.

Credit Supply and Corporate Innovations

We present evidence that banking development plays a key role in technological progress. We focus on manufacturing firms’ innovative performance, measured by patent-based metrics, and employ exogenous variations in banking development arising from the staggered deregulation of banking activities across US states during the 1980s and 1990s. We find that interstate banking deregulation had significant beneficial effects on the quantity and quality of innovation activities, especially for firms highly dependent on external capital and located closer to entering banks. Furthermore, we find that these results are strongly driven by a greater ability of deregulated banks to geographically diversify credit risk.

Productivity and efficiency dynamics in Indian banking: An input distance function approach incorporating quality of inputs and outputs

SUMMARYBanking technology is typically characterized by multiple inputs and multiple outputs that are associated with various attributes, such as different types of deposits, loans, number of accounts, classes of employees and location of branches. These quality differentials in inputs and outputs are mostly ignored in empirical studies. These omissions make the practical value of productivity studies in organizations like banks questionable because quality is a key component of performance. This paper proposes using hedonic aggregator functions (as a tool of aggregating inputs and outputs with quality attributes) within an input distance function framework and analyzes the impact of banking deregulation on efficiency and total factor productivity (TFP) change in the Indian banking industry using panel data for the period 1996–2005. Empirical results indicate that banks have improved their efficiency (from 61% in 1996 to 72% in 2005) during the post‐deregulation period, and the gain in efficiency of state‐owned banks has surpassed that of private banks. Improvement in capital base, as indicated by increased capital adequacy ratio, played an important role in ushering efficiency gain. The return to scale estimate suggests that state‐owned banks are operating far above their efficient scale and cost savings can be obtained by reducing their size of operations. Overall, TFP growth was above 3.5% annually. Both technical progress and technical efficiency change consistently played an important role in shaping TFP growth. Copyright © 2010 John Wiley & Sons, Ltd.

Interstate Banking Deregulation and Bank Loan Commitments

This paper uses the staggering timing of branching and interstate banking deregulation as a natural experiment to explore the effect of agency cost on the use of bank loan commitments. A simple inventory-based model shows that lower agency cost allows a bank to issue more loan commitments because lower agency cost alleviates the difficulty of liquidity management associated with loan commitments. Our empirical analysis confirms the model’s testable implication: Commercial banks issue more loan commitments after interstate banking deregulation, which lowers agency costs through expanded internal capital markets across states. However, the effect of branching deregulation is weak or non-existent. Considering the role of bank loan commitments, this result not only shows how banking deregulation affects bank balance sheets but also suggests one route through which interstate banking affects the real economy.

A Century of Firm – Bank Relationships: Did Banking Sector Deregulation Spur Firms to Add Banks and Borrow More?

We study the effects of the 1971 UK banking deregulation on firms’ financial and investment policies. Deregulation and intensifying competition in the banking sector spurred firms to increase leverage and invest more in research and development, especially in local banking markets with many banks already present. Bank debt similarly expanded while trade credit contracted. The 1971 banking deregulation was a turning point in the evolution of firm-bank relationships during the twentieth century. Indeed, for more than 80 years prior to deregulation most firms had a relationship with only one bank: This was no longer the case after 1971.

Banking Deregulation, Local Credit Supply, and Small Business Growth

I show that the deregulation of bank branching in the United States lowered the sensitivity of small business growth to local credit supply. In urban markets, within-state deregulation of branching resulted in an 80% decrease in the effect of local deposit growth on the growth of establishments with 20-99 employees. Across-state deregulation had an effect of comparable size in county markets. I fi nd effects of similar magnitude using employment growth and payroll growth as measures of business growth. Using the history of litigation over the scope of state bank regulation, I show these results continue to hold for states that deregulated branching for reasons that were unrelated to economic conditions. These fi ndings suggest that bank deregulation played an important role in insuring small businesses against local shocks to credit supply.

The Valuation Effects of Geographic Diversification: Evidence From U.S. Banks

This paper assesses the impact of the geographic diversification of bank holding company (BHC) assets across the United States on their market valuations. Using two novel identification strategies based on the dynamic process of interstate bank deregulation, we find that exogenous increases in geographic diversity reduce BHC valuations. These findings are consistent with the view that geographic diversity makes it more difficult for shareholders and creditors to monitor firm executives, allowing corporate insiders to extract larger private benefits from firms.

The Valuation Effects of Geographic Diversification: Evidence from U.S. Banks

This paper assesses the impact of the geographic diversification of bank holding company (BHC) assets across the United States on their market valuations. Using two novel identification strategies based on the dynamic process of interstate bank deregulation, we find that exogenous increases in geographic diversity reduce BHC valuations. These findings are consistent with the view that geographic diversity makes it more difficult for shareholders and creditors to monitor firm executives, allowing corporate insiders to extract larger private benefits from firms.

(Interstate) Banking and (interstate) trade: Does real integration follow financial integration?

We conjecture that banks present in two regions charge the appropriate risk premiums for trade-related projects between these markets, whereas higher rates are charged for projects involving shipments to markets where they are absent. These differences affect regional trade flows. US interstate banking deregulation serves as a natural experiment to test our model's implication with the Commodity Flow Survey data. Difference-in-differences estimates suggest that the trade share of state-pairs that allowed pairwise interstate entry increased by 14% over 10 years relative to non-integrated state-pairs. Instrumental variables estimates suggest that an actual increase in bank integration from zero to 2.28% (the mean) increases trade 17% to 25%.

Finance as a Barrier to Employment: Evidence from U.S. Banking Deregulation

Economic theory offers competing hypotheses about how the cost and availability of finance influence labor market outcomes. Making use of the U.S. banking reforms between the 1970s and the 1990s as a quasi-natural experiment, this paper studies the impact of credit market development on employment. This paper documents the significant effects of these reforms on employment growth. Potential channels between finance and employment are also investigated. Changes in the growth of the number of self-employed individuals, the entry and exit of firms, and investment growth do not explain most of the employment growth following the reforms. The reforms had a substantially higher impact in industries with higher labor intensity, which is consistent with the idea that labor has fixed costs that need to be financed.

Income Dynamics, Economic Rents, and the Financialization of the U.S. Economy

The 2008 collapse of the world financial system, while proximately linked to the housing bubble and risk-laden mortgage backed securities, was a consequence of the financialization of the U.S. economy since the 1970s. This article examines the institutional and income dynamics associated with the financialization of the U.S. economy, advancing a sociological explanation of income shifts into the finance sector. Complementary developments include banking deregulation, finance industry concentration, increased size and scope of institutional investors, the shareholder value movement, and dominance of the neoliberal policy model. As a result, we estimate that between 5.8 and 6.6 trillion dollars were transferred to the finance sector since 1980. We conclude that understanding inequality dynamics requires attention to market institutions and politics.

ANALISIS VARIABEL OPERASIONAL YANG BERPENGARUH TERHADAP EFISIENSI OPERASIONAL BANK PERKREDITAN RAKYAT (BPR) WILAYAH MALANG

Efficiency is important to industrial banking because since released the prudent deregulation of banking have growing new banks and making tight competitions on the industrial of bank. Not including if linked with existence of bank that must take or put outside fund where will given return on investment for survival live in future. So efficiency is important item to noticing. The operational variables influenced toward efficiency talked about are savings, total loan, total of spread value and total intermediate cost.This research aimed to know amount of savings, loan, amount of spread value, amount intermediate cost and degree efficiency of Bank Perkreditan Rakyat (BPR) in Malang district.The method to taking sample using Purposive Sampling Type Judgement Sampling is the method-taking sample with belonging non-probabilities where the selection based certain criteria is obtained 22 numbers BPR as sample by means of research periods 3 years (2001-2004) at the BPR in Malang areas. The analysis data used descriptive analysis and inferential statistic analysis, is the multiple regression analysis-using program Statistic Package for Social Science (SPSS) ver 10.5 for Windows 2000 with level of signifikan 5% ( = 5%).Based result of descriptive analysis, funded that amount of savings, amount of loans, amount of spread value, amount of intermediate cost, and degree of efficiency ever of Bank Perkreditan Rakyat (BPR) in Malang areas as long as period of research begin 2001 to 2004 are to much variation between one of BPR with other.

CEO pay incentives and risk-taking: Evidence from bank acquisitions

We analyze how the structure of executive compensation affects the risk choices made by bank CEOs. For a sample of acquiring U.S. banks, we employ the Merton distance to default model to show that CEOs with higher pay-risk sensitivity engage in risk-inducing mergers. Our findings are driven by two types of acquisitions: acquisitions completed during the last decade (after bank deregulation had expanded banks' risk-taking opportunities) and acquisitions completed by the largest banks in our sample (where shareholders benefit from ‘too big to fail’ support by regulators and gain most from shifting risk to other stakeholders). Our results control for CEO pay–performance sensitivity and offer evidence consistent with a causal link between financial stability and the risk-taking incentives embedded in the executive compensation contracts at banks.

Call-pricing equity returns and default risks of entry mode with brand perception in retail banking

Our paper focuses on a pattern of bank interest margin determination with entry competition in which a bank with home brand identity extends its advantage to an imperfectly competitive target market. We show that the bank with brand perception advantage subsequently has a lower equity return with a lower default risk whereas the incumbent facing such a threat has the opposite results. We argue that strategy on bank branding can be recognized as a high market share and low return-risk entry strategy under the geographic deregulation of retail banking.

Bank Deregulation and Performance in Nigeria

: We investigate the interrelationships among bank competition, risk taking and efficiency during banking sector reforms in Nigeria (1993–2008). Our modelling procedure involves three stages: we measure bank productive efficiency, using data envelopment analysis, and the evolution of bank competition, using conjectural variations (CV) methods; then, we use the CV estimates to test whether regulatory reforms influence bank competition; finally we investigate the impact of the reforms on bank behaviour. The evidence suggests that deregulation and prudential re-regulation influence bank risk taking and bank productive efficiency directly (direct impact) and via competition (indirect impact). Further, it is found that as competition increases, excessive risk taking decreases and efficiency increases. Overall, the evidence on Nigeria affirms policies that foster bank competition.

FINANCIAL DEVELOPMENT AND WAGE INEQUALITY: THEORY AND EVIDENCE

We argue that financial market development contributed to the rise in the skill premium and residual wage inequality in the United States since the 1980s. We present an endogenous growth model with imperfect credit markets and establish how improving the efficiency of these markets affects modes of production, innovation, and wage dispersion between skilled and unskilled workers. The experience of U.S. states following banking deregulation provides empirical support for our hypothesis. We find that wages of skilled workers increased by between 0.5% and 6.3% following deregulation while those of unskilled workers fell by between 3.5% and 8.7%. Similarly, residual (or within‐group) inequality increased; the 90–50 percentile ratio of residuals from a Mincerian wage regression and their standard deviation increased by 4.2% and 1.7%, respectively. (JEL E25, J31, G24)

Boss or Dupe: The Voter in American Politics

Boss or Dupe: The Voter in American Politics. In the woods, sometimes you eat the bear: sometimes the bear eats you. In politics, sometimes the voter is the boss; sometimes the voter is a dupe. The outcome is largely determined by the following fundamental principle of special-interest politics. When the voters know what they want, they get it: they are then the bosses.When the voters are clueless, the moneyed special interests, who make large campaign contributions, get what they want; the moneyed special interests are then the bosses and the voters are the dupes.When voters were clueless, moneyed special interests prevailed: Deregulation of S&Ls in 1982, which led to the S&L financial crisis and bailout. Deregulation of banking in 1999, which contributed to the Recession of 2007-2009, the bank financial crisis, and the need for the bank bailout.When voters knew what they wanted, they got it: Cleaner air: air pollution controls have been continually strengthened over time. Social welfare: adequate but not overly generous short-term safety net for the poor. The President sometimes pursues his own agenda, for good or ill, apart from what the voters or moneyed special interests want. Presidents Truman, Johnson, and George W. Bush led the country into disastrous wars. President Carter pursued a deregulation agenda that benefited the public. President Reagan, for several years, successfully pushed for increases in defense expenditures. President Clinton failed but President Obama succeeded in getting legislation for health care reform. Notwithstanding the vicissitudes of special-interest politics, American democracy has muddled through and done quite well over the long haul.

With whom to merge? A tale of the Spanish banking deregulation process

We propose a spatial competition model to study banks’ strategic responses to the asymmetric Spanish geographic deregulation process. We find that once the geographic deregulation process finishes, inter-regional mergers between savings banks are optimal whenever the economies of scale associated to merging activities are low. If there are large gains, then there will be mergers between savings and commercial banks.

Location and competition in retail banking

We investigate the impact of banking deregulation during the 1990s on consumer welfare. We estimate a spatial model of consumer demand for retail bank deposits that explicitly accounts for consumer disutility from distance traveled. This is important given the substantial changes in banks' branch networks observed in the data. Our model indicates that cross-price elasticities between banks whose branches are close to consumers (‘close’ banks) are larger than those between ‘far’ banks and more than double the cross-price elasticity of ‘close’ banks with respect to ‘far’ banks. We distinguish between thrifts and other banks and find that within-thrift competitive effects are stronger than within-bank effects or those between thrifts and banks. We use our estimates to predict the effect of changes in market structure on consumer welfare following the branching deregulation of the Riegle–Neal Act of 1994. Our results indicate that the median household gained around $60 per year from the changes. Approximately two thirds of the gains come from within-market changes in market structure. The gains were greater in markets with high initial numbers of banks than elsewhere.

Charter value, Tobin's Q and bank risk during the subprime financial crisis

Charter value is important in the banking industry because of its ability to reduce the moral hazard incentives that result from government-provided deposit insurance. Previous research suggests that geographic deregulation in the 1970s and 1980s increased competition and eroded charter values. Yet, a common proxy for charter value, Tobin's Q, increased significantly in the 1990s and beyond even as bank deregulation continued. We show that Tobin's Q is a poor cardinal measure of charter value though it still has merit as an ordinal measure. Our findings suggest that charter value has been declining through time, contributing to the increase in risk-taking that led to the subprime financial crisis.