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Bank integration and business volatility

  • Donald P. Morgan
  • Bertrand Rime
  • Philip E. Strahan

We investigate how bank migration across state lines over the last quarter century has affected the size and covariance of business fluctuations within states. Starting with a two-state version of the unit banking model in Holmstrom and Tirole (1997), we conclude that the theoretical effect of integration on business cycle size is ambiguous, because some shocks are dampened by integration while others are amplified. Empirically, we find that integration diminishes employment growth fluctuations within states and decreases the deviations in employment growth across states. In other words, business cycles within states become smaller with integration but more alike. Our results for the United States bear on the financial convergence under way in Europe, where banks remain highly fragmented across nations.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 129.

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Date of creation: 2001
Date of revision:
Handle: RePEc:fip:fednsr:129
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  1. Alan C. Stockman & Linda L. Tesar, 1990. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," NBER Working Papers 3566, National Bureau of Economic Research, Inc.
  2. Todd E. Clark & Eric Van Wincoop, 1999. "Borders and business cycles," Staff Reports 91, Federal Reserve Bank of New York.
  3. Houston, Joel & James, Christopher & Marcus, David, 1997. "Capital market frictions and the role of internal capital markets in banking," Journal of Financial Economics, Elsevier, vol. 46(2), pages 135-164, November.
  4. repec:oup:qjecon:v:111:y:1996:i:3:p:639-70 is not listed on IDEAS
  5. Jayaratne, Jith & Morgan, Donald P, 2000. "Capital Market Frictions and Deposit Constraints at Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 74-92, February.
  6. Josep García Blandón, 2000. "Cross-border banking in Europe: An empirical investigation," Economics Working Papers 509, Department of Economics and Business, Universitat Pompeu Fabra.
  7. repec:oup:qjecon:v:112:y:1997:i:3:p:663-91 is not listed on IDEAS
  8. Allen N. Berger & Rebecca Demsetz & Philip E. Strahan, 1998. "The consolidation of the financial services industry: causes, consequences, and implications for the future," Finance and Economics Discussion Series 1998-46, Board of Governors of the Federal Reserve System (U.S.).
  9. 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.
  10. Kenneth Spong, 1994. "Banking regulation : its purpose, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 1994bria.
  11. repec:oup:qjecon:v:114:y:1999:i:4:p:1437-1467 is not listed on IDEAS
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