Bank Integration and State Business Cycles
41 Pages Posted: 19 Apr 2003
Date Written: December 4, 2002
Interstate banking has ambiguous theoretical effects on state business volatility, but the (net) empirical effect has been stabilizing. In theory, bank diversification across states diminishes the impact of bank capital shocks on state activity, but amplifies the impact of firm collateral shocks. Empirically, we find that year-to-year employment growth fluctuations within states fall as banks in that state integrate (via holding companies) with banks in other states. The magnitudes are large. Bank integration matters most significantly in states with very undiversified economies. Consistent with our model, we also find that integration also weakens the correlation between bank capital growth and growth in state employment and bank lending but strengthens the correlation between changes in housing prices and employment and lending.
JEL Classification: G2
Suggested Citation: Suggested Citation