"Entry Restrictions, Industry Evolution and Dynamic Efficiency: Evidence from Commercial Banking"
Abstract: 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 reduced the performance of the average banking asset. We also find that most of the reduction in banks' costs were passed along to bank borrowers in the form of lower loan rates.
JEL Classification: G2, L5
This paper was presented at the Financial Institutions Center's conference on Performance of Financial Institutions, May 8-10, 1997.
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