These are two papers that analyze the impact of the introduction in the U.S. of the Interstate Banking and Branching Efficiency Act in 1994. The Act allowed large, out-of-state banks to expand into unrestricted local markets. This led to permanent increases in the total number of branches in deregulated areas and decreases in the amount of deposits of smaller local banks.
Banking deregulation and corporate bankruptcies
How does increased banking competition, as a consequence of deregulation, affect corporate bankruptcy risk? This is the question that Cathart et al. attempt to answer in this paper.
They use a difference-in-difference analysis and find that in environments where banking deregulation increases bank competition, high-leverage firms experience a substantial 1.6% rise in bankruptcy rates, relative to the pre-reform period. In a competitive banking environment, lenders may have fewer incentives to develop long-term relationships with their borrowers due to the instability of those arrangements. This could push banks to lend to less risky firms that can generate profits in the short run. Firms that are closer to default and have a negative short-term outlook may find it more difficult to access credit and see their rollover and bankruptcy risks increase.
Corporate Bankruptcy and Banking Deregulation: The Effect of Financial Leverage
Authors: Lara Cathcart, Alfonso Dufour, Ludovico Rossi, Simone Varotto
From: Imperial College Business School, University of Reading, CUNEF Universidad
Banking deregulation and demand for labor
In this paper, John Lynch explores the static and dynamic effects of banking deregulation on small businesses. He finds:
- An overall decline in lending to small businesses of 5.4% which lasted for several years.
- The decline in credit supply eventually led to a decrease in the number of small businesses.
- Firms that were able to stay in operation decreased their demand for labor. Specifically, there was an immediate decline in the employment and hours worked at small firms in newly deregulated markets, and even as small business lending recovered, these levels remained depressed for many years after that.
I provide evidence that when these large banks prioritized entering markets with greater wealth, in the form of aggregate deposits, and higher house prices, it came at the expense of small business lending. Additionally, small banks were generally the losers in the competition for local deposits and, as such, small businesses were further hurt since the very banks most specialized in making relationship loans had less funds to do so.
Does Banking Competition Really Increase Credit for All? The Effect of Bank Branching Deregulation on Small Business Credit
Author: John Lynch
From: Ohio State University
