Bank Branching Deregulation and the Syndicated Loan Market

Abstract

How do changes in banking regulation affect the syndicated loan market? Because branch networks and loan syndication both facilitate banks’ ability to diversify geographical credit risk, we focus on the Riegle-Neal Interstate Branching and Banking Efficiency Act of 1994. We investigate its staggered state-wise implementation in a triple-difference identification strategy, exploiting the fact that it only changed the legal framework for out-of-state commercial banks. We find that branching deregulation decreased syndicated loan issuance but spurred bilateral lending to corporations. This shift is also reflected in interest rate spreads, pointing to a supply-driven substitution effect. Our results suggest that changes to banking regulation can affect not just the amount but also type of credit in the economy.

Keywords: IBBEA, Interstate Branching Deregulation, Syndicated Loans

JEL Classification: G18, G21, G30