The Effects of Banking Competition on Growth and Financial Stability: Evidence from the National Banking Era

65 Pages Posted: 16 Jul 2018 Last revised: 12 Nov 2019

See all articles by Mark A. Carlson

Mark A. Carlson

Board of Governors of the Federal Reserve System

Sergio Correia

Board of Governors of the Federal Reserve System

Stephan Luck

Federal Reserve Bank of New York

Date Written: January 21, 2019

Abstract

How does banking competition affect credit provision and growth? How does it affect financial stability? In order to identify the causal effects of banking competition, we exploit a discontinuity in bank capital requirements during the 19th century National Banking Era. We show that banks operating in markets with lower entry barriers extend more credit. The resulting local credit boom, in turn, is associated with an expansion in real economic activity. However, banks in markets with lower entry barriers also take more risk and are also more likely to default. Thus, we provide causal evidence that banking competition can cause both, growth and financial instability.

Keywords: Banking, Banking Competition, Risk Taking, Credit Provision, Real Effects, Financial Crisis, Panic of 1893, Economic History, National Banking Era

JEL Classification: G00, G01, G20, G28, N2, N21

Suggested Citation

Carlson, Mark A. and Correia, Sergio and Luck, Stephan, The Effects of Banking Competition on Growth and Financial Stability: Evidence from the National Banking Era (January 21, 2019). Available at SSRN: https://ssrn.com/abstract=3202489 or http://dx.doi.org/10.2139/ssrn.3202489

Mark A. Carlson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
(202) 452-3987 (Phone)
(202) 452-2301 (Fax)

Sergio Correia

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Stephan Luck (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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