The Effects of Banking Competition on Growth and Financial Stability: Evidence from the National Banking Era
69 Pages Posted: 16 Jul 2018 Last revised: 2 Feb 2020
Date Written: January 21, 2019
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: Suggested Citation