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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 operating costs and loan losses decrease sharply 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 grow at the expense of their less-efficient rivals. By retarding the "natural" evolution of the industry, branching restrictions reduce the performance of the average banking asset. We also find that most of the reduction in banks' costs are passed along to bank borrowers in the form of lower loan rates.

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    Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 22.

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    Date of creation: 1997
    Date of revision:
    Handle: RePEc:fip:fednsr:22
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    1. 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.
    2. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-99, May.
    3. 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.
    4. Paul S. Calem, 1994. "The impact of geographic deregulation on small banks," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 17-31.
    5. Hubbard, R. Glenn & Palia, Darius, 1995. "Executive pay and performance Evidence from the U.S. banking industry," Journal of Financial Economics, Elsevier, vol. 39(1), pages 105-130, September.
    6. Economides, N. & Hubbard, R.G. & Palia, D., 1995. "The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition Among Small and Large Banks," Papers 95-14, Columbia - Graduate School of Business.
    7. Allen N. Berger & Robert DeYoung, 1997. "Problem loans and cost efficiency in commercial banks," Finance and Economics Discussion Series 1997-8, Board of Governors of the Federal Reserve System (U.S.).
    8. 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.
    9. Douglas W. Caves & Laurits R. Christensen & Joseph A. Swanson, 1981. "Economic Performance in Regulated and Unregulated Environments: A Comparison of U. S. and Canadian Railroads," The Quarterly Journal of Economics, Oxford University Press, vol. 96(4), pages 559-581.
    10. 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).
    11. 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.
    12. Flannery, Mark J., 1984. "The social costs of unit banking restrictions," Journal of Monetary Economics, Elsevier, vol. 13(2), pages 237-249, March.
    13. 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.
    14. 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.
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