Report on The Real Effects of U.S. Banking Deregulation

In the 1970s, commercial banks in the United States faced restrictions on interest rates, both on the deposit and lending sides of their business.They were restricted for the most part to classic financial intermediation—deposit-taking and lending—

to the exclusion, for example, of underwriting many corporate securities and insurance products. And banks were limited in the geographical scope of their operations. No state permitted banks headquartered in other states either to open branches or to buy their banks, and many states prohibited or restricted intrastate branching.

Today, almost all of these restrictions have been lifted: Interest rate ceilings on deposits were phased out in the early 1980s; state usury laws have been weakened because banks may now lend anywhere; and limits to banks’ ability to engage in other financial activities have been almost completely eliminated, as have restrictions on the geographical scope of banking.

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As a result, our banking system is now more competitive and more consolidated than ever—both vertically and horizontally. This paper focuses on how one dimension of this broad-based deregulation—the removal of limits on bank entry and expansion—affected economic performance. In a nutshell, the results suggest that this regulatory change was followed by the better performance of the real economy.

State economies grew faster and had higher rates of new business formation after this deregulation. At the same time, macroeconomic stability improved. By opening up markets and allowing the banking system to integrate across the nation, deregulation made local economies less sensitive to the fortunes of their local banks.
First, I explain how the relaxation of geographical restrictions on bank expansion proceeded historically
and why our somewhat unusual history of state-level regulation and deregulation presents an attractive setting to study how the financial system affects the real economy. I then present evidence that banking deregulation led to substantial and beneficial real effects on our economy.

Source: mba.final-year-projects.in

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