Entry in banking markets

Marina Traversa and Guillaume Vuillemey

No 461, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We show that adverse selection is a key determinant of banking market structure. Using data on US bank branches over 1981-2016, we study banks' decisions to expand or contract geographically. First, banks are more likely to expand in counties that are similar, in terms of industry shares, to those in which they already have branches. Second, when contracting, banks are more likely to close or sell branches in similar areas. These results suggest that banks value diversification, but that informational barriers prevent them from achieving optimal scale. These findings have implications for banking competition and the rise of fintechs.

Keywords: Banks; Barriers To Entry; Branching; Acquisitions; Diversification; Adverse Selection (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:333924

DOI: 10.2139/ssrn.3355572

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