Financial Integration and the Co-Movement of Economic Activity: Evidence from U.S. States

We analyze the effect of the geographic expansion of banks across U.S. states on the comovement of economic activity between states. Exploiting the removal of interstate banking restrictions to construct time-varying instrumental variables at the state-pair level, we find that bilateral banking integration increases output co-movement between states. The effect of financial integration depends on the nature of the idiosyncratic shocks faced by states and is stronger for more financially dependent industries. Finally, we show that integration (1) increases the similarity of bank lending fluctuations between states and (2) contributes to the transmission of deposit shocks across states.

Proprietary information and the cost of bank debt

PurposeThis study explores how the firm’s proprietary information has an impact on the bank loan contracts. It explains the propensity of using the competitive bid option (CBO) in the syndicate loans to solicit the best bid for innovative firms and how it changes based on industry competition and the degree of innovations. This research also examines how the interstate banking deregulation (Interstate Banking and Branching Efficiency Act) in 1994 affected the private loan contracts for innovative borrowers.Design/methodology/approachThe study uses various econometric analyses. First, it uses the propensity score matching analysis to see the impact of patents on pricing terms. Second, it uses the two-stage least square (2SLS) analysis by implementing the litigation and non-NYSE variables. Finally, it studies the impact of the policy change of the Interstate Banking and Branching Efficiency Act of 1994 on the bank loan contracts.FindingsFirms with more proprietary information pays more annual facility fees but less other fees. The patents are the primary determinants of the usage of CBO in the syndicate loans to solicit the best bid. While innovative firms can have better contract conditions by the CBO, firms with more proprietary information will less likely to use the CBO option to minimize the leakage of private information and the severe monitoring from the banks. Finally, more proprietary information lowered the loan spread for firms dependent on the external capital after the interstate banking deregulation.Originality/valueThe findings of this research will help senior executives with responsibility for financing their innovative projects. In addition, these findings should prove helpful for the lawmakers to boost economies.

Does Local Capital Supply Matter for Public Firms’ Capital Structures?

Publicly listed firms respond to capital supply conditions shaped by local investing preferences. Public firms headquartered in areas with higher proportions of senior citizens and women use more debt financing. These demographics are associated with conservative investing, leading to a higher and more stable local supply of debt capital. The demographics–leverage relation is more pronounced for firms that cannot easily tap public bond markets, which is the majority of public firms. Changes in firms’ financing activities around exogenous shocks to credit supplies, including interstate banking deregulation and the 2008–2009 financial crisis, support the local capital supply hypothesis.

Origins of too-big-to-fail policy in the United States

This article traces the origin of too-big-to-fail policy in modern US banking to the bailout of the $1.2b Bank of the Commonwealth in 1972. It describes this bailout and those of subsequent banks through that of Continental Illinois in 1984. During this period, market concentration due to interstate banking restrictions is a factor in most of the bailouts and systemic risk concerns were raised to justify the bailouts of surprisingly small banks. Finally, most of the bailouts in this period relied on the Federal Deposit Insurance Corporation's use of the Essentiality Doctrine and Federal Reserve lending. A discussion of this doctrine is used to illustrate how legal constraints on regulators may become less constraining over time.

Credit and the Labour Share: Evidence from US States

We investigate the role of credit markets as a cause for changes in the US labour share. Causal evidence is provided that the labour share declined between 0.8 and 1.2 percentage points following the interstate banking deregulation, explaining more than half of the overall reduction during that period. The lower costs of credit and greater bank competition in each state are mechanisms that led to the decline. To quantify the relationship between credit and factor payments, we calibrate a model with financial frictions and highlight financial development as a potential channel for the reduction in labour share observed globally.

The Impact of Bank Deregulations on Farm Financial Stress and Stability

Previous research on bank deregulation has supported the idea that interstate banking deregulation lowered the cost of credit and increased the net farm income. This analysis builds on that base by investigating whether the agricultural loan delinquency volume was also affected. Using a panel data fixed effects approach, deregulation was found to be associated with changes in the volume of delinquencies: interstate banking deregulation reduced the volume of production loan delinquencies, and de novo branching deregulation increased both production and real-estate loan delinquencies. Thus, deregulation’s outcome is not clear cut: interstate banking reduced farm financial stress but de novo deregulation increased it.

Bank Geographic Diversification and Corporate Innovation: Evidence from the Lending Channel

By integrating staggered interstate banking deregulation into a gravity model following Goetz, Laeven, and Levine (2013), (2016), we construct a time-varying, bank-specific instrument for geographic diversification and investigate its causal effect on corporate innovation via the lending channel. We find that bank geographic diversification spurs corporate innovation and enhances the economic value of innovation. We identify relaxing debt covenants and alleviating borrowers’ financial constraints as the two underlying mechanisms explaining the documented effects. Moreover, by offering lenient covenants, geographically diversified banks provide greater financial and operational flexibility to borrowing firms, enabling them to engage in future mergers and acquisitions.

Bank Geographic Diversification and Systemic Risk

Exploiting staggered interstate banking deregulation as exogenous shocks to bank geographic expansion, we examine the causal effect of geographic diversification on systemic risk. Using the gravity-deregulation approach, we find that bank geographic diversification leads to higher systemic risk measured by the change in conditional value at risk ($\Delta$CoVaR) and financial integration (Logistic($R^{2}))$. Furthermore, we document that geographic diversification affects systemic risk via its impact on asset similarity. The impact of geographic diversification on systemic risk is stronger in BHCs located in states comoving less with the U.S. aggregate economy.

Modeling Interstate Banking in the United States: the Spatial 3-Stage Least Squares Approach

This study uses a spatial 3-stage least squares approach to model interstate banking of the United States in 1994 and 2014. The method simultaneously takes into account spatial dependence, outward and inward interstate banking and their interaction, and the temporal effects in interstate banking. The study shows that a healthy economic structure, an expanding market, and permissive banking legislation encourage inward interstate banking. A healthy economic structure is a basis for strong banking firms to rise and to expand in other states. Large banking institutions were dominate in outward interstate banking while smaller firm sizes tend to be associated with inward interstate banking. By 2014, large and well-capitalized banking firms from states with a healthy economic structure had expanded into states with lower income levels, and lower capital-to-labor ratios, higher labor resource use, and lower profitability in their banking industry. Evidence shows some banking geographical fragmentation remains.

Holes in the Dike: The Global Savings Glut, U.S. House Prices, and the Long Shadow of Banking Deregulation

We show how capital inflows into and financial deregulation within the United States interacted in driving the recent boom and bust in U.S. housing prices. Interstate banking deregulation during the 1980s cast a long shadow: in states that opened their banking markets to out-of-state banks earlier, house prices were more sensitive to aggregate U.S. capital inflows during 1997–2012. Capital inflows relaxed the value-at-risk constraints of geographically diversified (“integrated”) U.S. banks more than those of local banks. Therefore, integrated banks absorbed a larger share of capital inflows and expanded mortgage lending more. This drove up housing prices.