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Bank integration and business volatility

Author

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

Abstract

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.

Suggested Citation

  • Donald P. Morgan & Bertrand Rime & Philip E. Strahan, 2001. "Bank integration and business volatility," Staff Reports 129, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:129
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    References listed on IDEAS

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    1. Jith Jayaratne & Philip E. Strahan, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, Oxford University Press, vol. 111(3), pages 639-670.
    2. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 663-691.
    3. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    4. Kenneth Spong, 2000. "Banking regulation : its purposes, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 2000bria, Jan 17.
    5. Clark, Todd E. & van Wincoop, Eric, 2001. "Borders and business cycles," Journal of International Economics, Elsevier, vol. 55(1), pages 59-85, October.
    6. 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.
    7. Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 135-194, February.
    8. 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.
    9. Randall S. Kroszner & Philip E. Strahan, 1999. "What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1437-1467.
    10. Kane, Edward J, 1996. "De Jure Interstate Banking: Why Only Now?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 141-161, May.
    11. Josep García Blandón, 2000. "Cross-border banking in Europe: An empirical investigation," Economics Working Papers 509, Department of Economics and Business, Universitat Pompeu Fabra.
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    Cited by:

    1. Yongjin, Park, 2008. "Parsimonious Lenders: Bank Concentration and Credit Availability to Small Businesses," MPRA Paper 9266, University Library of Munich, Germany.
    2. Philip E. Strahan, 2003. "The real effects of U.S. banking deregulation," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 111-128.
    3. Park, Yongjin, 2008. "Banking Market Concentration and Credit Availability to Small Businesses," MPRA Paper 9265, University Library of Munich, Germany.

    More about this item

    Keywords

    Business cycles ; Financial institutions ; Employment (Economic theory) ; Emigration and immigration;

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