Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence From Commercial Banking
Abstract
This article 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 reduced the performance of the average banking asset. We also find that most of the reduction in banks' costs were passed along to bank borrowers in the form of lower loan rates.
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The U.S. bank branch deregulations intensified competition and triggered improvements in banking services, reducing loan interest rates, raising deposit rates, lowering overhead costs, spurring better screening and monitoring, and reducing bad loans.
“The reforms intensified competition and triggered improvements in banking services, reducing interest rates on loans, raising them on deposits, lowering overhead costs, spurring the development of better techniques for screening and monitoring firms, and reducing the proportion of bad loans on the books of banks (Hubbard andPalia 1995, Jayaratne andStrahan 1998).”
From Finance, Growth, and Inequality (2021) · cites this paper as Jayaratne and Strahan 1998
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Self-citationFinance, Growth, and Inequality
Levine, R. (2021) · IMF Working Papers · doi:10.5089/9781513583365.001 · Cited by 62 · see citing works
- Authors
- Jayaratne, J., & Strahan, P. E.
- Venue
- The Journal of Law and Economics
- Publisher
- University of Chicago Press
- Published
- 1998-04
- Volume
- 41
- Issue
- 1
- Pages
- 239-274
- ISSN
- 0022-2186
- 1537-5285
- Cited by
- 363
- References
- 0
- Language
- en
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