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The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition Among Small and Large Banks

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Listed:
  • Nicholas Economides
  • R. Glen Hubbard
  • Darius Palia

Abstract

This paper suggests that the introduction of bank branching restrictions and federal deposit insurance in the United States likely was motivated by political considerations. Specifically, we argue that these restrictions were instituted for the benefit of the small, unit banks that were unable to compete effectively with large, multi-unit banks. We analyze this "political hypothesis" in two steps. First, we use a model of monopolistic competition between small and large banks to examine gains to the former group from the introduction of branching restrictions and government-sponsored deposit insurance. We then find strong evidence for the political hypothesis by examining the voting record of Congress.

Suggested Citation

  • Nicholas Economides & R. Glen Hubbard & Darius Palia, 1993. "The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition Among Small and Large Banks," Working Papers 93-23, New York University, Leonard N. Stern School of Business, Department of Economics.
    • Handle: RePEc:ste:nystbu:93-23
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • L5 - Industrial Organization - - Regulation and Industrial Policy

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