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

  • Jith Jayaratne
  • Philip E. Strahan
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    This paper shows that bank performance improves significantly after restrictions on bank expansion are lifted. We find that profits increase and loan quality improves 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 increase market share at the expense of their less efficient rivals. By retarding the "natural" evolution of the industry, branching restrictions reduced the performance of the average banking asset. We also find limited support for the hypothesis that more competitive banking markets following deregulation better discipline bank managers, thereby improving bank performance.

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    File URL: http://www.newyorkfed.org/research/staff_reports/research_papers/9630.html
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    File URL: http://www.newyorkfed.org/research/staff_reports/research_papers/9630.pdf
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    Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9630.

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    Date of creation: 1996
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    Handle: RePEc:fip:fednrp:9630
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    1. R. Glenn Hubbard & Darius Palia, 1994. "Executive Pay and Performance: Evidence from the U.S. Banking Industry," NBER Working Papers 4704, National Bureau of Economic Research, Inc.
    2. Allen N. Berger & Anil K. Kashyap & Joseph Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been," Center for Financial Institutions Working Papers 96-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
    3. 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.).
    4. 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.
    5. 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.
    6. Mark J. Flannery, . "The Social Costs of Unit Banking Restrictions," Rodney L. White Center for Financial Research Working Papers 15-82, Wharton School Rodney L. White Center for Financial Research.
    7. Berger, Allen N. & Hunter, William C. & Timme, Stephen G., 1993. "The efficiency of financial institutions: A review and preview of research past, present and future," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 221-249, April.
    8. repec:cup:cbooks:9780521818551 is not listed on IDEAS
    9. Warren G. Lavey, 1974. "Transportation/Communication Considerations in the Location of Headquarters for Multi-Establishment Manufacturing Firms," NBER Working Papers 0052, National Bureau of Economic Research, Inc.
    10. Paul S. Calem, 1994. "The impact of geographic deregulation on small banks," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 17-31.
    11. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August.
    12. Stephen A. Rhoades, 1986. "The operating performance of acquired firms in banking before and after acquisition," Staff Studies 149, Board of Governors of the Federal Reserve System (U.S.).
    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, vol. 1(May).
    14. 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.
    15. 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.
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