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

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  • Jith Jayaratne
  • Philip E. Strahan
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    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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    Bibliographic Info

    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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    Related research

    Keywords: Bank competition ; Banking law ; Branch banks ; Interstate banking;

    References

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    1. Allen N. Berger & Timothy H. Hannan, 1987. "The price-concentration relationship in banking," Research Papers in Banking and Financial Economics 100, Board of Governors of the Federal Reserve System (U.S.).
    2. Paul S. Calem, 1994. "The impact of geographic deregulation on small banks," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 17-31.
    3. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    4. Economides, Nicholas & Hubbard, R Glenn & Palia, Darius, 1996. "The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition among Small and Large Banks," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 667-704, October.
    5. Flannery, Mark J., 1984. "The social costs of unit banking restrictions," Journal of Monetary Economics, Elsevier, vol. 13(2), pages 237-249, March.
    6. Allen N. Berger & Robert DeYoung, 1997. "Problem loans and cost efficiency in commercial banks," Finance and Economics Discussion Series 1997-8, Board of Governors of the Federal Reserve System (U.S.).
    7. Schranz, Mary S, 1993. "Takeovers Improve Firm Performance: Evidence from the Banking Industry," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 299-326, April.
    8. R. Glenn Hubbard & Darius Palia, 1995. "Executive Pay and Performance: Evidence from the U.S. Banking Industry," NBER Working Papers 4704, National Bureau of Economic Research, Inc.
    9. Rhoades, Stephen A., 1982. "Welfare loss, redistribution effect, and restriction of output due to monopoly in banking," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 375-387.
    10. Kane, Edward J, 1996. "De Jure Interstate Banking: Why Only Now?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 141-61, May.
    11. Douglas D. Evanoff & Diana L. Fortier, 1987. "Reevaluation of the structure-conduct-performance paradigm in banking," Staff Memoranda 87-9, Federal Reserve Bank of Chicago.
    12. Allen N. Berger & Anil K. Kashyap & Joseph M. Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trips It's Been," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 55-218.
    13. Susan McLaughlin, 1995. "The impact of interstate banking and branching reform: evidence from the states," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue May.
    14. Hsiao,Cheng, 2003. "Analysis of Panel Data," Cambridge Books, Cambridge University Press, number 9780521522717.
    15. Caves, Douglas W & Christensen, Laurits R & Swanson, Joseph A, 1981. "Economic Performance in Regulated and Unregulated Environments: A Comparison of U.S. and Canadian Railroads," The Quarterly Journal of Economics, MIT Press, vol. 96(4), pages 559-81, November.
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