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The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition among Small and Large Banks

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  • Nicholas Economides
  • R. Glenn Hubbard
  • Darius Palia

Abstract

This paper suggests that the introduction of bank branching restrictions and federal deposit insurance in the United States likely was motivated by political considerations. Specifically, we argue that these restrictions were instituted for the benefit of the small, unit banks that were unable to compete effectively with large, multi- unit banks. We analyze this 'political hypothesis' in two steps. First, we use a model of monopolistic competition between small and large banks to examine gains to the former group from the introduction of branching restrictions and government-sponsored deposit insurance. We then find strong evidence for the political hypothesis by examining the voting record of Congress.

Suggested Citation

  • Nicholas Economides & R. Glenn Hubbard & Darius Palia, 1995. "The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition among Small and Large Banks," NBER Working Papers 5210, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5210
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    References listed on IDEAS

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    1. David C. Wheelock & Paul W. Wilson, 1994. "Can deposit insurance increase the risk of bank failure? Some historical evidence," Review, Federal Reserve Bank of St. Louis, issue May, pages 57-71.
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    3. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-491, June.
    4. Charles W. Calomiris & R. Glenn Hubbard & James H. Stock, 1986. "The Farm Debt Crisis and Public Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 441-486.
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    6. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
    7. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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    13. Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, January.
    14. Victor Goldberg, 1982. "Peltzman on regulation and politics," Public Choice, Springer, vol. 39(2), pages 291-297, January.
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    16. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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