Foreign Bank Entry and Business Volatility: Evidence from U.S. States and Other Countries
40 Pages Posted: 16 May 2003 Last revised: 2 Nov 2010
Date Written: May 2003
Theory suggests that bank integration (financial integration generally) can magnify or dampen the business cycles, depending on the importance of shocks to firm collateral versus shocks to the banking sector. In this paper, we show empirically that bank integration across U.S. states over the late 1970s and 1980 dampened economic volatility within states. Internationally, however, we find that foreign bank integration, which advanced widely during the 1990s, has been either unrelated to volatility of firm investment spending or positively related to that volatility. The results suggest the possibility that business spending may become more volatile as countries open their banking sectors to foreign entry.
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