Branch banking, bank competition, and financial stability

Mark Carlson and Kris James Mitchener

No 2005-20, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: It is often argued that branching stabilizes banking systems by facilitating diversification of bank portfolios; however, previous empirical research on the Great Depression offers mixed support for this view. Analyses using state-level data find that states allowing branch banking had lower failure rates, while those examining individual banks find that branch banks were more likely to fail. We argue that an alternative hypothesis can reconcile these seemingly disparate findings. Using data on national banks from the 1920s and 1930s, we show that branch banking increases competition and forces weak banks to exit the banking system. This consolidation strengthens the system as a whole without necessarily strengthening the branch banks themselves. Our empirical results suggest that the effects that branching had on competition were quantitatively more important than geographical diversification for bank stability in the 1920s and 1930s.

Keywords: Branch banks; Competition (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-com, nep-fmk and nep-sea
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Branch Banking, Bank Competition, and Financial Stability (2006)
Working Paper: Branch Banking, Bank Competition, and Financial Stability (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2005-20

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