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Branch Banking, Bank Competition, and Financial Stability
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One of the foundations of the theoretical literature on banking regulation is that
branch banking leads to more stable banking systems by enabling banks to better
diversify their assets and widen their depositor base (Gart 1994, Hubbard 1994). This
conventional wisdom has been used to argue that historical banking crises in the United
States, especially those of the 1930s, would have been less severe had the U.S. permitted
widespread branch banking (Friedman and Schwartz 1963, Calomiris 2000). The
empirical literature examining U.S. banking instability during the Great Depression,
however, has not universally confirmed this prediction. In fact, this research presents a
paradox. Studies using aggregate bank failure data from the Depression find that states
that allowed branch banking had lower failure rates than those that only allowed unit (or
single-office) banking (Wheelock 1995, Mitchener 2000a, 2004); although the result is
consistent with the diversification hypothesis, these studies do not test the precise channel
through which branching reduced failures. In contrast, studies using individual bank data
from the same period cast doubt on the common view that the stabilizing benefits of
branching operated via increased diversification opportunities. Calomiris and Mason
(2000) and Carlson (2004) find that banks with branches were more likely to fail than
unit banks, in part because they pursued strategies to reduce reserves rather than to
diversify their portfolios.
Mark Carlson and Kris James Mitchener - Personal Name
1st Edition
NONE
Branch Banking, Bank Competition, and Financial Stability
Management
English
2005
1-55
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