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

Jith Jayaratne and Philip E. Strahan

No 9630, Research Paper from Federal Reserve Bank of New York

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.

Keywords: Bank management; Branch banks; Commercial loans; Bank competition (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (7)

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