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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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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 02-10.

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Date of creation: Dec 2001
Date of revision:
Handle: RePEc:wop:pennin:02-10
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  1. 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.
  2. 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.
  3. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. 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.
  5. 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.).
  6. Todd E. Clark & Eric Van Wincoop, 1999. "Borders and business cycles," Staff Reports 91, Federal Reserve Bank of New York.
  7. Kenneth Spong, 1994. "Banking regulation : its purpose, implementation, and effects," Monograph, Federal Reserve Bank of Kansas City, number 1994bria.
  8. repec:tpr:qjecon:v:111:y:1996:i:3:p:639-70 is not listed on IDEAS
  9. repec:tpr:qjecon:v:114:y:1999:i:4:p:1437-1467 is not listed on IDEAS
  10. 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.
  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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