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Bank Integration and Business Volatility

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  • Donald Morgan
  • Bertrand Rime
  • Philip E. Strahan

Abstract

We investigate how bank migration across state lines over the last quarter century has affected the size and covariance of business fluctuations across states. Starting with a two-state version of the unit banking model in Holmstrom and Tirole (1997), we conclude that the theoretical effect of integration on business fluctuations is ambiguous because integration dampens the impact of bank capital shocks but amplifies the impact of firm collateral shocks. The net effect empirically seems stabilizing, however, as we find fluctuations in employment growth within states falls as integration rises, especially when we instrument for the level of integration and control for employment composition within states. Integration also weakens the link between bank capital growth within states and growth in state employment and bank lending.

Suggested Citation

  • Donald Morgan & Bertrand Rime & Philip E. Strahan, 2001. "Bank Integration and Business Volatility," Center for Financial Institutions Working Papers 02-10, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:02-10
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    File URL: http://fic.wharton.upenn.edu/fic/papers/02/0210.pdf
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    References listed on IDEAS

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    1. Jith Jayaratne & Philip E. Strahan, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 639-670.
    2. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
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    7. Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 135-194, February.
    8. Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
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    10. Randall S. Kroszner & Philip E. Strahan, 1999. "What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(4), pages 1437-1467.
    11. Kane, Edward J, 1996. "De Jure Interstate Banking: Why Only Now?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 141-161, May.
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    Cited by:

    1. Yongjin, Park, 2008. "Parsimonious Lenders: Bank Concentration and Credit Availability to Small Businesses," MPRA Paper 9266, University Library of Munich, Germany.
    2. Philip E. Strahan, 2003. "The real effects of U.S. banking deregulation," Review, Federal Reserve Bank of St. Louis, vol. 85(Jul), pages 111-128.
    3. Park, Yongjin, 2008. "Banking Market Concentration and Credit Availability to Small Businesses," MPRA Paper 9265, University Library of Munich, Germany.

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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G2 - Financial Economics - - Financial Institutions and Services
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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