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Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985

Author

Listed:
  • Bertrand, Marianne
  • Schoar, Antoinette S
  • Thesmar, David

Abstract

This Paper empirically investigates the impact of distortions in the banking sector on the structure and dynamics of product markets as well as on firm level outcomes. Our analysis suggests that an increase in the efficiency of the banking industry can have first-order effects not only on the lending relationship between banks and firms, but also on the structure and dynamics of product markets overall. The particular reform we consider is the deregulation of the French banking industry in the mid 1980s. This deregulation eliminated government interference in bank lending decisions and allowed French banks to compete more freely in the credit market. Post deregulation, we find that banks are less willing to bail out poorly performing firms and that these firms experience a steeper increase in the cost of capital. Subsequently, firms in the more bank-dependent industries have a somewhat higher propensity to undertake restructuring measures. At the industry-level, we observe an increase in asset and job reallocation in the bank dependent sectors, mostly due to higher entry and exit rates of firms. We also find an improvement in allocative efficiency across firms as well as a decline in industry concentration ratios. Overall, these findings are consistent with a model where distortions in bank lending create artificial barriers to entry in the real sectors of the economy. A more efficient banking sector therefore appears to play an important role in fostering a Schumpeterian process of ‘creative destruction’.

Suggested Citation

  • Bertrand, Marianne & Schoar, Antoinette S & Thesmar, David, 2004. "Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985," CEPR Discussion Papers 4488, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4488
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    Keywords

    banking deregulation; economic development; industry structure;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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