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Entry restrictions, industry evolution, and dynamic efficiency: evidence from commercial banking

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  • Jith Jayaratne
  • Philip E. Strahan

Abstract

This paper 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 reduce the performance of the average banking asset. We also find that most of the reduction in banks' costs are passed along to bank borrowers in the form of lower loan rates.

Suggested Citation

  • Jith Jayaratne & Philip E. Strahan, 1997. "Entry restrictions, industry evolution, and dynamic efficiency: evidence from commercial banking," Staff Reports 22, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:22
    Note: For a published version of this report, see Jith Jayaratne and Philip E. Strahan, "Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence from Commercial Banking," Journal of Law and Economics 41, no.1 (April 1998): 239-73.
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    References listed on IDEAS

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    Cited by:

    1. Vicente Safón, 2008. "Promotion of service industries by means of entry restriction: the case of operators in the slot machine industry," The Service Industries Journal, Taylor & Francis Journals, vol. 30(1), pages 85-97, May.

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    More about this item

    Keywords

    bank competition; banking law; branch banks; interstate banking;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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