The Real Effects of U.S. Banking Deregulation

Abstract

In the 1970s, commercial banks in the United States faced restrictions on interest rates, both on the deposit and lending sides of their business. And banks were limited in the geographical scope of their operations. 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. 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 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.