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Entry restrictions, industry evolution and dynamic efficiency: evidence from commercial banking

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Author Info
Jith Jayaratne
Philip E. Strahan
Abstract

This paper shows that bank performance improves significantly after restrictions on bank expansion are lifted. We find that profits increase and loan quality improves 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 increase market share at the expense of their less efficient rivals. By retarding the "natural" evolution of the industry, branching restrictions reduced the performance of the average banking asset. We also find limited support for the hypothesis that more competitive banking markets following deregulation better discipline bank managers, thereby improving bank performance.

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Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9630.

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Date of creation: 1996
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Handle: RePEc:fip:fednrp:9630

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Related research
Keywords: Bank competition ; Bank management ; Branch banks ; Commercial loans;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Stephen A. Rhoades, 1986. "The operating performance of acquired firms in banking before and after acquisition," Staff Studies 149, Board of Governors of the Federal Reserve System (U.S.).
  2. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-99, May. [Downloadable!] (restricted)
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  3. Rhoades, Stephen A., 1982. "Welfare loss, redistribution effect, and restriction of output due to monopoly in banking," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 375-387. [Downloadable!] (restricted)
  4. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August. [Downloadable!] (restricted)
  5. Paul S. Calem, 1994. "The impact of geographic deregulation on small banks," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 17-31. [Downloadable!]
  6. Susan McLaughlin, 1995. "The impact of interstate banking and branching reform: evidence from the states," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue May. [Downloadable!]
  7. Schranz, Mary S, 1993. "Takeovers Improve Firm Performance: Evidence from the Banking Industry," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 299-326, April. [Downloadable!] (restricted)
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May. [Downloadable!] (restricted)
  9. Hubbard, R. Glenn & Palia, Darius, 1995. "Executive pay and performance Evidence from the U.S. banking industry," Journal of Financial Economics, Elsevier, vol. 39(1), pages 105-130, September. [Downloadable!] (restricted)
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  10. Allen N. Berger & Anil K. Kashyap & Joseph Scalise, 1995. "The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been," Center for Financial Institutions Working Papers 96-06, Wharton School Center for Financial Institutions, University of Pennsylvania.
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  11. Berger, Allen N. & Hunter, William C. & Timme, Stephen G., 1993. "The efficiency of financial institutions: A review and preview of research past, present and future," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 221-249, April. [Downloadable!] (restricted)
  12. Flannery, Mark J., 1984. "The social costs of unit banking restrictions," Journal of Monetary Economics, Elsevier, vol. 13(2), pages 237-249, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Charles W. Calomiris & Thanavut Pornrojnangkool, 2005. "Monopoly-Creating Bank Consolidation? The Merger of Fleet and BankBoston," NBER Working Papers 11351, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Claessens, Stijn & Glaessner, Tom, 1998. "The internationalization of financial services in Asia," Policy Research Working Paper Series 1911, The World Bank. [Downloadable!]
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