Big-bad-banks-The-winners-and-losers-from-bank-der

THEJOURNALOFFINANCE•VOL.LXV,NO.5•OCTOBER2010BigBadBanks?TheWinnersandLosersfromBankDeregulationintheUnitedStatesTHORSTENBECK,ROSSLEVINE,andALEXEYLEVKOV∗ABSTRACTWeassesstheimpactofbankderegulationonthedistributionofincomeintheUnitedStates.Fromthe1970sthroughthe1990s,moststatesremovedrestrictionsonintrastatebranching,whichintensifiedbankcompetitionandimprovedbankper-formance.Exploitingthecross-state,cross-timevariationinthetimingofbranchderegulation,wefindthatderegulationmateriallytightenedthedistributionofin-comebyboostingincomesinthelowerpartoftheincomedistributionwhilehavinglittleimpactonincomesabovethemedian.Bankderegulationtightenedthedistribu-tionofincomebyincreasingtherelativewageratesandworkinghoursofunskilledworkers.INCOMEDISTRIBUTIONALCONSIDERATIONShaveplayedacentral—ifnotthecentral—roleinshapingthepoliciesthatgovernfinancialmarkets.Forin-stance,ThomasJefferson’sfearsthatconcentratedbankingpowerwouldhelpwealthyindustrialistsattheexpenseofothersspurredhimtofightagainsttheBankoftheUnitedStates,andsimilaranxietiesfueledAndrewJackson’svetoofthere-charteringoftheSecondBankoftheUnitedStates(Hammond(1957),Bodenhorn(2003)).Duringthe20thcentury,politiciansinmanyU.S.statesimplementedandmaintainedrestrictionsonbankbranching,arguingthattheformationoflargebankswoulddisproportionatelycurtailtheeconomicoppor-tunitiesofthepoor(Southworth(1928),White(1982),KrosznerandStrahan(1999)).Andtoday,inthemidstofafinancialcrisis,uneaseaboutcentral-izedeconomicpowerandgrowingincomeinequalityhavefueleddebatesaboutGramm-Leach-Blileyandthedesirabilityofstifferregulationsonfinancialcon-glomerates.1However,whilebeliefsabouttheinfluenceoffinancialregulations∗BeckisfromCentER,DepartmentofEconomicsandEBC,TilburgUniversity;LevineiswiththeBrownUniversityandNBER;LevkoviswithTheFederalReserveBankofBoston.MartinGoetzandCarlosEspinaprovidedexceptionalresearchassistance.Wethankananonymousref-eree,theEditors,PhilStrahan,andYonaRubinsteinfordetailedcommentsonearlierdrafts.WereceivedmanyhelpfulcommentsattheBankofIsrael,BoardofGovernorsoftheFederalReserveSystem,BrownUniversity,BostonUniversity,InternationalMonetaryFund,EuropeanCentralBank,GeorgiaStateUniversity,NewYorkUniversity,TilburgUniversity,VanderbiltUniversity,UniversityofFrankfurt,UniversityofLausanne,UniversityofMannheim,UniversityofVirginia,andtheWorldBank.WearegratefultotheCharlesG.KochCharitableFoundationforprovidingfinancialsupport.TheviewsexpressedhereinarethoseoftheauthorsandnotnecessarilythoseoftheFederalReserveBankofBostonortheFederalReserveSystem.1Oncompensationinthefinancialsectorandincomeinequalityintheoveralleconomy,seePhilipponandReshef(2009)andKaplanandRauh(2010).Manyhaverecentlysuggestedthat16371638TheJournalofFinanceRonthedistributionofincomeaffectpolicies,researchershavedevotedfewre-sourcestowardevaluatingtheactualimpactoffinancialregulationsonthedistributionofincome.Inthispaperweeconometricallyevaluatethecausalimpactofbankregulationsonincomedistribution.Theoreticaldebatesandwelfareconcernsfurthermotivateouranalysesofthedistributionaleffectsofbankregulation.Ifbankingisanaturalmonopoly,thenunregulated,monopolisticbanksmayearnrentsthroughhighfixedfeesthatdisproportionatelyhurtthepoorasdevelopedinmodelsbyGreenwoodandJovanovic(1990),BanerjeeandNewman(1993),andGalorandZeira(1993).Countervailingarguments,however,challengetheviewthatrestrictingtheconsolidationandexpansionofbankswillhelpthepoor.Regulatoryrestrictionsonbankmergers,acquisitions,andbranchingcouldcreateandprotectlocalbankingmonopolies,curtailingcompetitionandraisingfeesthatprimarilyhurtthepoor.Inlightofthisdebate,weevaluatewhetherregulatoryrestrictionsonbankexpansionincreased,decreased,orhadnoeffectonincomeinequality.Furthermore,bankregulationscoulddirectlyaffectsocialwelfarebyalteringthedistributionofincome.AssummarizedbyKahnemanandKrueger(2006)andClark,Frijters,andShields(2008),peoplecareaboutrelativeincome,aswellasabsoluteincomeandrisk.Thus,understandingtheimpactoffinancialregulationsonthedistributionofincomeprovidesadditionalinformationonthewelfareimplicationsoffinance.Morespecifically,thispaperassesseshowbranchderegulationalteredthedistributionofincomeintheUnitedStates.Fromthe1970sthroughthe1990s,moststatesremovedrestrictionsonintrastatebranching,whichintensifiedbankcompetitionandimprovedbankefficiencyandperformance(Flannery(1984),JayaratneandStrahan(1998)).Researchershaveexaminedtheim-pactofthesereformsoneconomicgrowth(JayaratneandStrahan(1996),Huang(2008)),entrepreneurship(BlackandStrahan(2002),KerrandNanda(2009)),economicvolatility(Morgan,Rime,andStrahan(2004),Demyanyk,Ostergaard,andSørensen(2007)),andthewagegapbetweenmaleandfemalebankexecutives(BlackandStrahan(2001)).Inthispaper,weprovidethefirstevaluationoftheimpactofbranchderegulationonthedistributionofincomeintheoveralleconomyandhelpresolveadebateaboutbankderegulationthatextendsacrosstwocenturies.Theremovalofbranchingrestrictionsbystatesprovidesanaturalsettingforidentifyingandassessingwhowonandlostfrombankderegulation.AsshownbyKrosznerandStrahan(1999),nationaltechnologi