Regulatory Competition and Cross-Fertilization in the US Banking Markets: A Tiebout Extension and Empirical Evidence

Abstract

We incorporate arguments from the Tiebout model into the regulatory competition equilibrium and study cross-fertilization in the productivity growth of banks between those in a state and others in this state’s neighboring states. Empirically, we focus on two time periods: before (i.e., 1971-1977) and during (i.e., 1982-1995) the interstate multi bank holding company (IMBHC) deregulations, upon which, cross-border bank M&As, mainly among neighboring states, could enhance cross-fertilization by injecting new blood and awakening the market for corporate control. Results show that cross-fertilization in bank performance, observed among neighboring states before the IMBHC deregulations, gets stronger upon implementing these deregulations.

Keywords: Spatial interaction, Tiebout Model, Bank deregulations, Commercial banks, Productivity growth, Kalman Filter

JEL Classification: G21, G28, G34, K23, D24, C23, R12