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Does the Structure of Banking Markets Affect Economic Growth? Evidence from U.S. State Banking Markets (Mitchener K. J., Wheelock D. C.)

Competition and Market Power

Abstract This paper examines the relationship between the structure of banking markets and economic growth using a new dataset on manufacturing industry-level growth rates and banking market concentration for U.S. states during 1899-1929 - a period when the manufacturing sector was expanding rapidly and restrictive branching laws segmented the U.S. banking system geographically. Unlike studies of developing and developed countries today, we find that banking market concentration generally had a positive impact on manufacturing sector growth in the early twentieth century United States, with a somewhat stronger impact on industries with lower rates of incorporation and less reliance on bond markets (and, hence, relatively more reliance on banks). Because regulations affecting bank entry varied considerably across U.S. states and the industrial organization of the U.S. banking system differs markedly from those of other countries, we consider the impact of other aspects of banking market structure and policy on growth. Even after controlling for other banking market factors, including branch banking and state-level deposit insurance, we find that concentration boosted industrial growth.
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Libref/ Mitchener K. J., Wheelock D. C. (2010) “Does the Structure of Banking Markets Affect Economic Growth? Evidence from U.S. State Banking Markets”, NBER Working Paper No. 15710, pp. 1-41
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