Entry Restrictions, Industry Evolution, And Dynamic Efficiency: Evidence from Commercial Banking

49 Pages Posted: 22 Jun 2007

See all articles by Jith Jayaratne

Jith Jayaratne

Compass Lexecon

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: March 1997

Abstract

This paper shows that bank performance improves significantly after restrictions on bank expansion are lifted. We find that operating costs and loan losses decrease sharply after states permit statewide branching and, to a lesser extent, after states allow interstate banking. The improvements following branching deregulation appear to occur because better banks grow at the expense of their less-efficient rivals. By retarding the "natural"evolution of the industry, branching restrictions reduce the performance of the average banking asset. We also find that most of the reduction in banks' costs are passed along to bank borrowers in the form of lower loan rates.

Keywords: bank, deregulation, loan rates

JEL Classification: G2, L5

Suggested Citation

Jayaratne, Jith and Strahan, Philip E., Entry Restrictions, Industry Evolution, And Dynamic Efficiency: Evidence from Commercial Banking (March 1997). FRB of New York Staff Report No. 22. Available at SSRN: https://ssrn.com/abstract=993822 or http://dx.doi.org/10.2139/ssrn.993822

Jith Jayaratne (Contact Author)

Compass Lexecon

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Philip E. Strahan

Boston College - Department of Finance ( email )

Carroll School of Management
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United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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