Can Deregulation of Branch Banking Improve Capital Allocation? Evidence from the Great Depression
The Great Depression led to dramatic increases in bank regulation.
One study looks at an instance of bank deregulation during this period: state-level sanctioning of
bank branching, which allowed banks to operate multiple offices within a state. … [S]tates with extensive branching in 1940 … experienced long-run gains in manufacturing productivity.
The study also
assessed the role of capital reallocation using bank and branch-level balance sheet data from 1937. … Branch offices located in capital-constrained counties … were twice as likely to receive funding on net from other banks and branches than comparable stand-alone banks in the same areas.
In addition, the new
branch networks improved capital allocation by directing funds to where they were most scarce, a function that stand-alone banks could not perform.
All in all, these
findings provide evidence that the institutional structure of branching—rather than simply expanded banking access—improved capital allocation and integrated financial markets to fuel manufacturing productivity growth, especially in underserved areas.
