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

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

March 1997 Number 22

JEL classification: G2, L5

Authors: Jith Jayaratne and Philip E. Strahan

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 reduce the performance of the average banking asset. We also find that most of the reduction in banks' costs are passed along to bank borrowers in the form of lower loan rates.

Available only in PDF PDF

49 pages / 2,927 kb

For a published version of this report, see Jith Jayaratne and Philip E. Strahan, "Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence from Commercial Banking," Journal of Law and Economics 41, no.1 (April 1998): 239-73.

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