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Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence from Commercial Banking

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  • Jayaratne, Jith
  • Strahan, Philip E
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    Abstract

    This article shows that bank performance improves significantly after restrictions on bank expansion are lifted. We find that operating costs and loan losses decrease sharply after states permit statewide branching and, to a lesser extent, after states allow interstate banking. The improvements following branching deregulation appear to occur because better banks grow at the expense of their less efficient rivals. By retarding the "natural" evolution of the industry, branching restrictions reduced the performance of the average banking asset. We also find that most of the reduction in banks' costs were passed along to bank borrowers in the form of lower loan rates. Copyright 1998 by the University of Chicago.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Law & Economics.

    Volume (Year): 41 (1998)
    Issue (Month): 1 (April)
    Pages: 239-73

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    Handle: RePEc:ucp:jlawec:v:41:y:1998:i:1:p:239-73

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    Web page: http://www.journals.uchicago.edu/JLE/

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