What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions

107

Credit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. In this study, we develop a test to determine if the household demand channel is present, and we implement the test using both a natural experiment in the United States in the 1980s and an international panel of 56 countries over the last several decades. Consistent with the importance of the household demand channel, we find that credit supply expansion boosts nontradable sector employment and the price of nontradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle and lead to more severe recessions.

Section: Exclusion Restrictionmentioning

confidence: 99%

How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels

Mian¹,

Sufi²,

Verner

2020

107

“…Kroszner and Strahan (1999) argue that banking deregulation and technological change are correlated. Specifically, they argue that deregulation occurred when the benefits enjoyed by private interest groups (small banks and insurance firms) in favor of banking restrictions were eroded by, among other things, technological innovations that altered the costs and benefits of the restrictions.…”

Section: Alternative Explanations For the Increase In Income Insumentioning

confidence: 99%

“…Intrastate Branching Restrictions : We measure the direct effect of branching deregulation using two indicator variables: D m&a equals one in years in which state‐wide branching by mergers and acquisitions is permitted, and D novo equals one in years in which state‐wide de novo branching is permitted. These definitions follow Jayaratne and Strahan (1996) and Kroszner and Strahan (1999). Deregulation dates come from Amel (1993) and Kroszner and Strahan (1999), updated from individual states' codes and bills available from the state legislatures; see Table I.…”

Section: Datamentioning

confidence: 99%

See 1 more Smart Citation

U.S. Banking Deregulation, Small Businesses, and Interstate Insurance of Personal Income

Demyanyk¹,

Østergaard²,

Sørensen

2007

148

We estimate the effects of deregulation of U.S. banking restrictions on interstate personal income insurance for the period 1970 to 2001. Interstate income insurance occurs when personal income reacts less than one-to-one to state-specific output shocks. We find that insurance improved after banking deregulation, with a larger effect in states where small businesses are more important and on proprietors' income than on other components of personal income. Our explanation centers on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners. Copyright 2007 by The American Finance Association.

“…We further contribute to the literature on relationship banking and the importance of soft information in loan production. The literature suggests that relationships add value because banks have information about borrowers (e.g., Diamond (1984), James (1987)); that relationships increase the availability of credit and reduce interest rates on loans, especially for small firms (e.g., Berger and Udell (1995), Petersen and Rajan (2002)); and that, while deregulation and technological change have brought significant changes in the banking system (e.g., Kroszner and Strahan (1999)), small banks may be able to maintain the advantages associated with relationship banking (e.g., Berger et al (1998Berger et al ( , 2005). A related recent strand of literature argues that, despite significant improvements in financial innovations, such as securitization over the past few years, the location of the branch network still matters for a bank's investment decisions (Gilje, Loutskina, and Strahan (2013)).…”

mentioning

confidence: 99%

Selling Failed Banks

Granja

Matvos

Seru

2017

109

The average FDIC loss from selling a failed bank is 28% of assets. We document that failed banks are predominantly sold to bidders within the same county, with similar assets business lines, when these bidders are well capitalized. Otherwise, they are acquired by less similar banks located further away. We interpret these facts within a model of auctions with budget constraints, in which poor capitalization of some potential acquirers drives a wedge between their willingness and ability to pay for failed banks. We document that this wedge drives misallocation, and partially explains the FDIC losses from failed bank sales.