Working Paper: NBER ID: w9704
Authors: Donald P. Morgan; Bertrand Rime; Philip E. Strahan
Abstract: We investigate how the better integration of U.S. banks across states has affected economic volatility within states. In theory, the link between bank integration and volatility is ambiguous; integration tends to dampen the impact of bank capital shocks on state activity, but it amplifies the impact of firm collateral shocks. Empirically, the net effect has been stabilizing as year-to-year fluctuations in employment growth within states fall as that state's banks become better integrated (via holding companies) with banks in other states. The magnitudes are large, and the effects are most pronounced in states with relatively undiversified economies. Consistent with our model, we find the link between economic growth and bank capital within a state weakens with integration, whereas the link between growth and housing prices (a possible proxy for firm capital) tends to increase.
Keywords: Bank Integration; Economic Volatility; State Business Cycles
JEL Codes: G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank Integration (F30) | Economic Volatility of State Employment Growth (J69) |
| Bank Integration (F30) | Insulation from Bank Capital Shocks (F65) |
| Bank Integration (F30) | Exposure to Collateral Shocks (F65) |
| Economic Growth (O49) | Weakened Link with Bank Capital in Integrated States (F65) |
| Bank Integration (F30) | Net Stabilizing Effect on Economic Volatility (E32) |
| Less Diversified Economies (F69) | More Pronounced Stabilizing Effects of Bank Integration (F65) |