Entry Restrictions, Industry Evolution and Dynamic Efficiency: Evidence from Commercial Banking

Jith Jayaratne and Philp E. Strahan

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

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-codes: G2 L5 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:wop:pennin:97-30

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