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Bank Integration and Business Volatility


  • Donald 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 across 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 fluctuations is ambiguous because integration dampens the impact of bank capital shocks but amplifies the impact of firm collateral shocks. The net effect empirically seems stabilizing, however, as we find fluctuations in employment growth within states falls as integration rises, especially when we instrument for the level of integration and control for employment composition within states. Integration also weakens the link between bank capital growth within states and growth in state employment and bank lending.

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  • Donald Morgan & Bertrand Rime & Philip E. Strahan, 2001. "Bank Integration and Business Volatility," Center for Financial Institutions Working Papers 02-10, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:02-10

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    References listed on IDEAS

    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.

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