Ebook Bank Integration And Business Volatility In The U.S.
Banking in the United States was once highly disunited. Instead of a few, very large banks branched out across the states, we had essentially 50 separate banking systems, one for every state. Integration began in the late 1970s, as states began opening their doors to out-of-state banks.
Big bank holding companies marched in, forming even bigger companies by merging and buying up other holding companies and unit banks. This integration has not only produced larger (but fewer) U.S. banks, as many have noted, it has also transformed our fragmented banking industry of twenty-five years ago into a much more nationally integrated, geographically diversified system (Map).
What of it? Why should bank integration warrant attention here? Under segregated banking, the fate of the state and its banks were closely tied; as went the states, so went the banks. Farm price deflation in the early 1980s bankrupted many farmers and many farm banks, just as falling oil prices in the late 80s wiped out a lot of Texans and Texas banks. Falling prices may have precipitated these events, but the associated financial distress—the deterioration in bank capital and borrower collateral in particular--may have amplified the ultimate impact of the shocks, or so a large literature maintains (Bernanke, Gertler et al).
This paper investigates how the integration of our banking system has altered state business cycle dynamics, both within and across states. To investigate the theoretical effects, we add a second (physical) state to Holmstrom and Tirole (1997) unit banking model. By stylizing results from other models, they manage to incorporate the firm collateral and bank capital shocks considered in isolation in other models. Both shocks are contractionary with unit banking, not surprisingly, but the impact is transmitted not just through falling investment demand but also via contracting bank credit supply. When we add the second state, we find that interstate banking dampens the own-state effect of bank capital but amplifies the impact of firm collateral shocks. As a theoretical matter, we conclude that bank integration has an ambiguous affect on state business volatility.
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