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

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

Author Info

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.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 22.

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Date of creation: 1997
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Handle: RePEc:fip:fednsr:22

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Other versions:
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Other versions:
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