Working Paper: NBER ID: w11291
Authors: Mark Carlson; Kris James Mitchener
Abstract: It is often argued that branching stabilizes banking systems by facilitating diversification of bank portfolios; however, previous empirical research on the Great Depression offers mixed support for this view. Analyses using state-level data find that states allowing branch banking had lower failure rates, while those examining individual banks find that branch banks were more likely to fail. We argue that an alternative hypothesis can reconcile these seemingly disparate findings. Using data on national banks from the 1920s and 1930s, we show that branch banking increases competition and forces weak banks to exit the banking system. This consolidation strengthens the system as a whole without necessarily strengthening the branch banks themselves. Our empirical results suggest that the effects that branching had on competition were quantitatively more important than geographical diversification for bank stability in the 1920s and 1930s.
Keywords: branch banking; bank competition; financial stability
JEL Codes: G21; N22; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| geographical diversification (R12) | bank failures (G21) |
| branch banking (G21) | competition (L13) |
| competition (L13) | exit of weaker banks (F65) |
| exit of weaker banks (F65) | overall stability of the banking system (G21) |
| branch banking (G21) | overall stability of the banking system (G21) |
| branch banking (G21) | mergers and voluntary liquidations (G33) |
| competition (L13) | bank failures (G21) |