Banking Deregulation, Local Credit Supply, and Small Business Growth

Abstract

I show that the deregulation of bank branching in the United States lowered the sensitivity of small business growth to local credit supply. In urban markets, within-state deregulation of branching resulted in an 80% decrease in the effect of local deposit growth on the growth of establishments with 20-99 employees. Across-state deregulation had an effect of comparable size in county markets. I fi…nd effects of similar magnitude using employment growth and payroll growth as measures of business growth. Using the history of litigation over the scope of state bank regulation, I show these results continue to hold for states that deregulated branching for reasons that were unrelated to economic conditions. These fi…ndings suggest that bank deregulation played an important role in insuring small businesses against local shocks to credit supply.

Keywords: banking, deregulation, growth, credit

JEL Classification: G21, G28, E32