Working Paper: NBER ID: w22195
Authors: Liangliang Jiang; Ross Levine; Chen Lin
Abstract: Does an intensification of competition among banks increase or decrease liquidity creation? By integrating the dynamic process of interstate bank deregulation that lowered barriers to competition across U.S. states over the 1980s and 1990s with the gravity model of the geographic expansion of banks, we construct time-varying measures of the competitive pressures facing each individual bank. We find that regulatory-induced competition reduced liquidity creation. Consistent with some theories, we also find that the liquidity-destroying effects of competition are mitigated among more profitable banks and heightened among smaller banks.
Keywords: bank competition; liquidity creation; regulatory reform; interstate deregulation
JEL Codes: G21; G28; G32; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competition (L13) | liquidity creation (E51) |
| deregulation-induced competition pressures (L43) | competition (L13) |
| competition (L13) | profit margins (L21) |
| competition (L13) | relationship lending (G21) |
| profit margins (L21) | liquidity creation (E51) |
| relationship lending (G21) | liquidity creation (E51) |
| smaller banks (G21) | greater reduction in liquidity creation (E59) |