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The benefits of branching deregulation

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  • Jith Jayaratne
  • Philip E. Strahan

Abstract

When the Riegle-Neal Interstate Banking and Branching Efficiency Act went into effect in June 1997, it marked the final stage of a quarter-century-long effort to relax geographic restrictions on banks. This article examines an earlier stage of the deregulatory process-the actions taken by the states between 1978 and 1992 to remove the barriers to intrastate branching and interstate banking-to determine how the lifting of geographic restrictions affect the efficiency of the banking industry. The analysis reveals that banks' loan losses and operating costs fell sharply following the state initiatives, and that the cost declines were largely passed along to bank borrowers in the form of lower loan rates. The authors argue that these efficiency gains arose because better performing banks were able to expand their market share once geographic restraints were erased.

Suggested Citation

  • Jith Jayaratne & Philip E. Strahan, 1997. "The benefits of branching deregulation," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 13-29.
  • Handle: RePEc:fip:fednep:y:1997:i:dec:p:13-29:n:v.3no.4
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    References listed on IDEAS

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    1. Donald T. Savage, 1993. "Interstate banking: a status report," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 1075-1089.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Dodd-Frank, the CHOICE Act and Small Banks
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-12-12 20:34:17

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    Cited by:

    1. Jeffery W. Gunther & Kenneth J. Robinson, 1999. "Industry mix and lending environment variability: what does the average bank face," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 24-31.
    2. Nippani, Srinivas & Green, Kenneth Jr., 2002. "The banking industry after the Riegle-Neal Act: re-structure and overall performance," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(5), pages 901-909.
    3. Utrero-Gonzalez, Natalia, 2007. "Banking regulation, institutional framework and capital structure: International evidence from industry data," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(4), pages 481-506, September.
    4. Feng, Guohua & Gao, Jiti & Peng, Bin & Zhang, Xiaohui, 2017. "A varying-coefficient panel data model with fixed effects: Theory and an application to US commercial banks," Journal of Econometrics, Elsevier, vol. 196(1), pages 68-82.
    5. Yongil Jeon & Stephen M. Miller, 2002. "An 'Ideal' Deconposition of Industry Dynamics: An Application to the Nationwide and State Level U.S. Banking Industry," Working papers 2002-23, University of Connecticut, Department of Economics.
    6. Carbo Valverde, Santiago & Rodriguez Fernandez, Francisco, 2007. "The determinants of bank margins in European banking," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 2043-2063, July.
    7. Paul Edelstein & Donald P. Morgan, 2006. "Local or state? Evidence on bank market size using branch prices," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 15-25.
    8. Yongil Jeon & Stephen M. Miller, 2007. "Births, Deaths, And Marriages In The U.S. Commercial Banking Industry," Economic Inquiry, Western Economic Association International, vol. 45(2), pages 325-341, April.
    9. Fecht, Falko & Grüner, Hans Peter & Hartmann, Philipp, 2007. "Welfare Effects of Financial Integration," CEPR Discussion Papers 6311, C.E.P.R. Discussion Papers.
    10. Zou, YongDong & Miller, Stephen M. & Malamud, Bernard, 2011. "Geographic deregulation and commercial bank performance in U.S. state banking markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(1), pages 28-35, February.
    11. Timothy J. Yeager, 2002. "The demise of community banks? local economic shocks aren't to blame," Supervisory Policy Analysis Working Papers 2002-03, Federal Reserve Bank of St. Louis.
    12. Tirupam Goel, 2016. "Banking industry dynamics and size-dependent capital regulation," BIS Working Papers 599, Bank for International Settlements.
    13. Timothy J. Yeager, 2002. "Community bank performance in the presence of county economic shocks," Supervisory Policy Analysis Working Papers 2002-11, Federal Reserve Bank of St. Louis.
    14. Kozlowski, Paul J., 2006. "Financial Evolution in Core and Peripheral Areas: Tracking Ohio's Metropolitan Experience," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 0(Issue 1), pages 1-14.
    15. Valverde, S. Carbo & Humphrey, David B. & Fernandez, F. Rodriguez, 2003. "Bank deregulation is better than mergers," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(5), pages 429-449, December.
    16. Huang, Rocco, 2007. "Evaluating the real effect of bank branching deregulation: comparing contiguous counties across U.S. state borders," Working Paper Series 788, European Central Bank.
    17. Iftekhar Hasan & Krzysztof Jackowicz & Oskar Kowalewksi & Lukasz Kozlowski, 2017. "The Economic Impact of Changes in the Local Bank Presence," Working Papers 2017-ACF-01, IESEG School of Management.
    18. Huberto M. Ennis, 2001. "On the size distribution of banks," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 1-25.
    19. Santiago Carbó Valverde & Francisco Rodríguez Fernández, 2005. "The determinants of bank margins revisited: A note on the effects of diversification," ThE Papers 05/11, Department of Economic Theory and Economic History of the University of Granada..
    20. Huang, Rocco R., 2008. "Evaluating the real effect of bank branching deregulation: Comparing contiguous counties across US state borders," Journal of Financial Economics, Elsevier, vol. 87(3), pages 678-705, March.
    21. Hubert P. Janicki & Edward Simpson Prescott, 2006. "Changes in the size distribution of U.S. banks: 1960-2005," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 291-316.
    22. Andrew P. Meyer & Timothy J. Yeager, 2001. "Are small rural banks vulnerable to local economic downturns?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 25-38.
    23. Kris James Mitchener, 2006. "Are Prudential Supervision and Regulation Pillars of Financial Stability? Evidence from the Great Depression," NBER Working Papers 12074, National Bureau of Economic Research, Inc.
    24. Chernobai, Anna & Ozdagli, Ali K. & Wang, Jianlin, 2016. "Business complexity and risk management: evidence from operational risk events in U. S. bank holding companies," Working Papers 16-16, Federal Reserve Bank of Boston.

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    Keywords

    Branch banks ; Interstate banking ; Banking law;

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