Working Paper: CEPR ID: DP5863
Authors: Yuliya Demyanyk; Charlotte Ostergaard; Bent E. Sørensen
Abstract: We estimate the effects of deregulation of U.S. banking restrictions on the amount of interstate personal income insurance during the period 1970--2001. Interstate income insurance occurs when personal income reacts less than one-to-one to state-specific shocks to output. We find that income insurance improved after banking deregulation, and that this effect is larger in states where small businesses are more important. We further show that the impact of deregulation is stronger for proprietors' income than other components of personal income. Our explanation of this result centers on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners. Our analysis casts light on the real effects of bank deregulation, on the risk sharing function of banks, and on the integration of bank markets.
Keywords: Financial deregulation; Integration of bank markets; Interstate risk sharing; Small business finance
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banking deregulation (G28) | Interstate income insurance (G52) |
| Banking deregulation (G28) | Financial integration among states (F30) |
| Financial integration among states (F30) | Better risk-sharing mechanisms (G52) |
| Banking deregulation (G28) | Smoothing of personal income relative to state-specific output shocks (H31) |
| Banking deregulation (G28) | Improved bank efficiency (G21) |
| Banking deregulation (G28) | Better risk-sharing practices (G32) |
| Banking deregulation (G28) | Increased reliance on bank financing for small businesses (G21) |
| Increased reliance on bank financing for small businesses (G21) | Improved interstate income insurance (G52) |
| Banking deregulation (G28) | Proprietors' income improvement (D33) |