Competitive Dynamics of Deregulation: Evidence from U.S. Banking

Abstract

This paper examines the impact of increased competition from deregulation on the dynamics of the U.S. banking industry. We find the link between a bank's relative performance and its subsequent market share growth strengthens significantly after deregulation as competitive reallocation effects transfer assets to better performers. Exit dynamics also change in ways consistent with the disciplinary role of competition. The net effect is a substantial reallocation of market share toward better banks. We conclude that earlier regulation of U.S. banks blunted this market mechanism and seriously hindered the competitive process.

JEL Classification: G21