Entry Restrictions, Industry Evolution, And Dynamic Efficiency: Evidence from Commercial Banking
49 Pages Posted: 22 Jun 2007
Date Written: March 1997
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: Suggested Citation