Interstate Banking Deregulation Research Articles

Banking deregulation, macroeconomic dynamics and monetary policy

We assess the effects of increased bank competition on macroeconomic and lending dynamics and on the transmission of monetary policy. Applying panel local projections to state-level data, we, in a first step, investigate the dynamic effects of fiercer bank competition induced by deregulation allowing geographical expansion of banks across state borders in the 1980s and early-1990s. We allow for possible adjustments before the new laws became effective due to potential anticipation effects. Our findings suggest that these events were anticipated and that they temporarily increased economic activity as well as business and consumer lending. We also find a permanent increase in real estate lending and house prices. In a second step, we show that the impact of monetary policy on economic activity, house prices and lending tended to become stronger after interstate banking deregulation.

Why does structural change accelerate in recessions? The credit reallocation channel

The decline of the U.S. manufacturing share since 1960 has occurred disproportionately during recessions. Using evidence from two natural experiments—the collapse of Lehman Brothers in 2008 and U.S. interstate banking deregulation in the 1980s—I find a role for credit reallocation in explaining this phenomenon by showing that losing access to credit disproportionately hurt manufacturing firms, and that the creation of new credit disproportionately benefited nonmanufacturing firms. These results arise endogenously from a model with technology-driven structural change and fixed costs of establishing new financial relationships. The model suggests an important role for long-run industry trajectories in properly accounting for the costs and benefits of policy interventions in credit markets.

U.S. banking deregulation and local economic growth: A spatial analysis

The economic literature has largely ignored the existence of global common factors and local spatial dependence in the assessment of the real effects of U.S. banking deregulation. Motivated by consistency concerns, this study uses spatial econometric models with common factors to analyze the impact of U.S. banking deregulation on county-level economic growth during the 1970–2000 period. We estimate the direct effects of banking deregulation, as well as the size, geographic scope and source of any spatial spillovers. Statistically and economically significant growth effects were experienced by counties in states that deregulated intrastate branching, but only after an initial period without any growth effects. We find no significant growth effects of interstate banking deregulation. During the later half of the sample, intrastate branching deregulation increased the average expected annual growth rates of counties in the deregulated state by about 0.5 p.p. in the long run. Local spatial dependence turns out to be a crucial feature of county-level economic growth, even after common factors are accounted for. As a result, significant spatial spillovers of intrastate branching deregulation were experienced by counties in states surrounding the deregulated state during the later half of the sample. Intrastate branching deregulation increased the average expected annual growth rates of counties adjacent to the deregulated state by about 0.2 p.p. in the long run, while the spillovers to hinterland counties in adjacent states were still about 0.05–0.1 p.p. A comparison to models that ignore common factors or local spatial dependence substantiates our consistency concerns.

Banking Market Development and Spillovers to Stock Market Liquidity

We exploit the staggered removal of a geography-based market friction—the adoption of interstate banking deregulation—to investigate whether banking market development can spill over to the functioning of the equity market, measured as stock market liquidity. Interstate banking deregulation prompted large, sophisticated, out-of-state banks to lend within deregulating states’ borders, potentially altering equity traders’ costs of screening and monitoring borrowers, gathering funds, and/or expectations about economic growth in deregulating states. We find that stock market liquidity increases following banking deregulation, especially for borrowers characterized by greater screening and monitoring costs. Overall, our findings suggest that banking development has positive spillover effects on the functioning of the equity market.

US banking deregulation and local economic growth: A spatial analysis

The economic literature has largely ignored the existence of global common factors and local spatial dependence in the assessment of the real effects of U.S. banking deregulation. Motivated by consistency concerns, this study uses spatial econometric models with common factors to analyze the impact of U.S. banking deregulation on county-level economic growth during the 1970–2000 period. We estimate the direct effects of banking deregulation, as well as the size, geographic scope and source of any spatial spillovers. Statistically and economically significant growth effects were experienced by counties in states that deregulated intrastate branching, but only after an initial period without any growth effects. We find no significant growth effects of interstate banking deregulation. During the later half of the sample, intrastate branching deregulation increased the average expected annual growth rates of counties in the deregulated state by about 0.5 p.p. in the long run. Local spatial dependence turns out to be a crucial feature of county-level economic growth, even after common factors are accounted for. As a result, significant spatial spillovers of intrastate branching deregulation were experienced by counties in states surrounding the deregulated state during the later half of the sample. Intrastate branching deregulation increased the average expected annual growth rates of counties adjacent to the deregulated state by about 0.2 p.p. in the long run, while the spillovers to hinterland counties in adjacent states were still about 0.05–0.1 p.p. A comparison to models that ignore common factors or local spatial dependence substantiates our consistency concerns.

Why Does Structural Change Accelerate in Recessions? The Credit Reallocation Channel

The decline of the U.S. manufacturing share since 1960 has occurred disproportionately during recessions. Using evidence from two natural experiments—the collapse of Lehman Brothers in 2008 and U.S. interstate banking deregulation in the 1980s—I document a role for credit reallocation in explaining this phenomenon. Specifically, I show that losing access to credit disproportionately hurt manufacturing firms, and that the creation of new credit disproportionately benefited nonmanufacturing firms. These results arise endogenously from a model with technology-driven structural change and fixed costs of establishing new financial relationships. The model suggests an important role for long-run industry trajectories in properly accounting for the costs and benefits of policy interventions in credit markets.

Why Does Structural Change Accelerate in Recessions? The Credit Reallocation Channel

The decline of the US manufacturing share since 1960 has occurred disproportionately during recessions. Using evidence from two natural experiments—the collapse of Lehman Brothers in 2008 and US interstate banking deregulation in the 1980s—I document a role for credit reallocation in explaining this phenomenon by showing that losing access to credit disproportionately hurt manufacturing firms, and that the creation of new credit disproportionately benefited nonmanufacturing firms. These results arise endogenously from a model with technology-driven structural change and fixed costs of establishing new financial relationships. The model suggests an important role for long-run industry trajectories in properly accounting for the costs and benefits of policy interventions in credit markets.

Local Investors' Preferences and Capital Structure

Publicly listed firms respond to capital supply conditions shaped by local investing preferences. Public firms headquartered in areas with higher proportions of senior citizens and women use more debt financing. These demographics are associated with conservative investing, leading to a higher and more stable local supply of debt capital. The demographics-leverage relation is more pronounced for firms that cannot easily tap public bond markets, which is the majority of public firms. Changes in firms’ financing activities around exogenous shocks to credit supplies – including interstate banking deregulation and the 2008-2009 financial crisis – support the local capital supply hypothesis.

Proprietary information and the cost of bank debt

PurposeThis study explores how the firm’s proprietary information has an impact on the bank loan contracts. It explains the propensity of using the competitive bid option (CBO) in the syndicate loans to solicit the best bid for innovative firms and how it changes based on industry competition and the degree of innovations. This research also examines how the interstate banking deregulation (Interstate Banking and Branching Efficiency Act) in 1994 affected the private loan contracts for innovative borrowers.Design/methodology/approachThe study uses various econometric analyses. First, it uses the propensity score matching analysis to see the impact of patents on pricing terms. Second, it uses the two-stage least square (2SLS) analysis by implementing the litigation and non-NYSE variables. Finally, it studies the impact of the policy change of the Interstate Banking and Branching Efficiency Act of 1994 on the bank loan contracts.FindingsFirms with more proprietary information pays more annual facility fees but less other fees. The patents are the primary determinants of the usage of CBO in the syndicate loans to solicit the best bid. While innovative firms can have better contract conditions by the CBO, firms with more proprietary information will less likely to use the CBO option to minimize the leakage of private information and the severe monitoring from the banks. Finally, more proprietary information lowered the loan spread for firms dependent on the external capital after the interstate banking deregulation.Originality/valueThe findings of this research will help senior executives with responsibility for financing their innovative projects. In addition, these findings should prove helpful for the lawmakers to boost economies.

Does Local Capital Supply Matter for Public Firms’ Capital Structures?

AbstractPublicly listed firms respond to capital supply conditions shaped by local investing preferences. Public firms headquartered in areas with higher proportions of senior citizens and women use more debt financing. These demographics are associated with conservative investing, leading to a higher and more stable local supply of debt capital. The demographics–leverage relation is more pronounced for firms that cannot easily tap public bond markets, which is the majority of public firms. Changes in firms’ financing activities around exogenous shocks to credit supplies, including interstate banking deregulation and the 2008–2009 financial crisis, support the local capital supply hypothesis.

Credit and the Labour Share: Evidence from US States

AbstractWe investigate the role of credit markets as a cause for changes in the US labour share. Causal evidence is provided that the labour share declined between 0.8 and 1.2 percentage points following the interstate banking deregulation, explaining more than half of the overall reduction during that period. The lower costs of credit and greater bank competition in each state are mechanisms that led to the decline. To quantify the relationship between credit and factor payments, we calibrate a model with financial frictions and highlight financial development as a potential channel for the reduction in labour share observed globally.

The Impact of Bank Deregulations on Farm Financial Stress and Stability

Previous research on bank deregulation has supported the idea that interstate banking deregulation lowered the cost of credit and increased the net farm income. This analysis builds on that base by investigating whether the agricultural loan delinquency volume was also affected. Using a panel data fixed effects approach, deregulation was found to be associated with changes in the volume of delinquencies: interstate banking deregulation reduced the volume of production loan delinquencies, and de novo branching deregulation increased both production and real-estate loan delinquencies. Thus, deregulation’s outcome is not clear cut: interstate banking reduced farm financial stress but de novo deregulation increased it.

Bank Geographic Diversification and Corporate Innovation: Evidence from the Lending Channel

AbstractBy integrating staggered interstate banking deregulation into a gravity model following Goetz, Laeven, and Levine (2013), (2016), we construct a time-varying, bank-specific instrument for geographic diversification and investigate its causal effect on corporate innovation via the lending channel. We find that bank geographic diversification spurs corporate innovation and enhances the economic value of innovation. We identify relaxing debt covenants and alleviating borrowers’ financial constraints as the two underlying mechanisms explaining the documented effects. Moreover, by offering lenient covenants, geographically diversified banks provide greater financial and operational flexibility to borrowing firms, enabling them to engage in future mergers and acquisitions.

Bank Geographic Diversification and Systemic Risk

Abstract Exploiting staggered interstate banking deregulation as exogenous shocks to bank geographic expansion, we examine the causal effect of geographic diversification on systemic risk. Using the gravity-deregulation approach, we find that bank geographic diversification leads to higher systemic risk measured by the change in conditional value at risk ($\Delta$CoVaR) and financial integration (Logistic($R^{2}))$. Furthermore, we document that geographic diversification affects systemic risk via its impact on asset similarity. The impact of geographic diversification on systemic risk is stronger in BHCs located in states comoving less with the U.S. aggregate economy.

US Banking Deregulation and Local Economic Growth: Direct Effects and Externalities

This study investigates the effects of banking deregulation on county-level economic growth in the U.S. during the 1970–2000 period. Our main contribution to the literature is that we analyze both the direct and external effects of banking deregulation on local economic growth. For the regions South, West and Northeast, we find significantly positive long-run direct effects of intrastate branching deregulation on the expected growth rates of counties in the deregulated state itself, up to several percentage points. We also establish significantly positive long-run external effects on the expected growth rates of counties adjacent to the deregulated state, up to several tenths of percentage points. We do not find such robust effects for interstate banking deregulation.

Holes in the Dike: The Global Savings Glut, U.S. House Prices, and the Long Shadow of Banking Deregulation

Abstract We show how capital inflows into and financial deregulation within the United States interacted in driving the recent boom and bust in U.S. housing prices. Interstate banking deregulation during the 1980s cast a long shadow: in states that opened their banking markets to out-of-state banks earlier, house prices were more sensitive to aggregate U.S. capital inflows during 1997–2012. Capital inflows relaxed the value-at-risk constraints of geographically diversified (“integrated”) U.S. banks more than those of local banks. Therefore, integrated banks absorbed a larger share of capital inflows and expanded mortgage lending more. This drove up housing prices.

Competition and Bank Risk: Evidence from Geographic Bank Deregulation

We examine the effects of competition on bank risk. We find strong evidence that interstate banking deregulation — which generally increases bank competition — is associated with lower bank risk and some evidence intrastate branching increases bank risk. Further, interstate banking reduces bank risk more in sparsely populated states. Additional analyses suggest that in contrast to previous studies that focus on large banks, the impact of interstate banking deregulation on bank risk is driven by small banks, with strong small banks having lower risk after interstate banking. However, intrastate branching deregulation is associated with higher risk for small and medium banks.

Bank Geographic Diversification and Systemic Risk

Exploiting staggered interstate banking deregulation as exogenous shocks to bank geographic expansion, we examine the causal effect of geographic diversification on systemic risk. Using the gravity-deregulation approach developed in Goetz, Laeven, and Levine (2013, 2016), we find that bank geographic diversification leads to higher systemic risk measured by the change in conditional value at risk (ΔCoVaR) and financial integration (Logistic(R2)). Furthermore, we document that geographic diversification affects systemic risk via its impact on asset similarity. The impact of geographic diversification on systemic risk is stronger in BHCs located in states comoving less with the U.S. aggregate economy.

Bank Geographic Diversification and Corporate Innovation: Evidence from the Lending Channel

By integrating the staggered interstate bank deregulation into a gravity model following Goetz, Laeven, and Levine (2013, 2016), we construct a time-varying bank-specific instrument for geographic diversification and investigate its causal effect on corporate innovation via the lending channel. We find that bank geographic diversification spurs corporate innovation, and enhances the economic value of innovation. We identify relaxing debt covenants and alleviating borrowers’ financial constraints as the two underlying mechanisms for the documented effects. Moreover, via offering lenient covenants, geographically diversified banks provide greater financial and operational flexibility to borrowing firms, facilitating them to engage in future mergers and acquisitions.

Bank Integration and the Market for Corporate Control: Evidence from Cross-State Acquisitions

How does bank integration affect the market for corporate control for nonfinancial firms? We provide causal evidence that interstate bank deregulation affects acquisitions mainly through reducing the information asymmetry between acquirers and targets, instead of increased credit supply. After deregulation, the likelihood of cross-state acquisitions significantly increases, and more so if the target borrows from an out-of-state bank, the target’s bank is acquired by an out-of-state bank, the target’s state has reciprocal interstate bank deregulation with the acquirer’s state, or the target is opaque. The reduced information asymmetry increases announcement returns for acquirers of out-of-state (particularly private) targets after deregulation.