Keywords: Branching banking, bank consolidation, financial stability, great depression
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.
Full paper (453 KB PDF)
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Last update: May 2, 2005