Deregulating the geographical restrictions on commercial banks

This dissertation adds another chapter to the literature on barriers to entry by examining the economic effects of deregulating the geographical restrictions on commercial banks. The recent trend towards nationwide banking by most states and the reluctance of some states to adopt any interstate banking measures present a natural experiment for studying the effects of removing barriers to entry in the banking industry. Interstate banking traditionally has been a controversial issue. Advocates want interstate banking because of the diversification and economies of scale benefits of having access to a wider geographic scale of operations. Critics, on the other hand, are concerned that the increased competition from deregulating the geographical restrictions on commercial banks would have 'destructive competition' effects. It is therefore an empirical issue as to what are the effects of interstate banking. By measuring the direct impact of interstate banking, this dissertation also presents important evidence for resolving some of the interstate banking controversies.; This dissertation uses two different methods to measure the effects of recent deregulations on the geographical restrictions of commercial banks. The first method, using the event study methodology, draws on capital market data for evidence, while the second method, using the operating performance approach, relies on accounting data for evidence. Despite philosophical differences between the event study methodology and the operating performance approach, both methods yield similar findings regarding the effects of interstate banking; contrary to the indirect findings of most other studies, the findings of this dissertation reject the hypothesis that interstate banking has no effect on the performances of commercial banks. Evidence from both the capital market data and the accounting data, in particular, yield three major conclusions. First, although interstate banking benefits banks in terms of increased profitability, it also increases the banks' risk. Second, banks generally grew at a much faster rate during the interstate banking periods. Furthermore, the banks' rapid growth appears to be financed by increases in the leverage of banks. Third, performance evaluation produces mixed findings on the operating efficiency of banks.