Real macroeconomic effects of United States banking deregulation

Since the 1970s, the structure of the U.S. banking industry has changed considerably following deregulation of restrictions on branching and interstate banking. The ensuing wave of consolidation has increased the average bank company size and allowed banks to expand into new geographical markets by operating larger branch networks or bank holding companies. Banks play a central role in the allocation of capital in the economy and is the prime source of finance to small businesses. Two studies in this work examine if the changes in bank market structure have had real effects for small business owners and self-employed.;The first study estimates the effects of deregulation of U.S. banking restrictions on the amount of interstate personal income insurance during the period 1970–2001. Interstate income insurance occurs when personal income reacts less than one-to-one to state-specific shocks to output. It is found that income insurance improved after banking deregulation, and that this effect is larger in states where small businesses are more important. It is further shown that the impact of deregulation is stronger for proprietors' income than for wage income. The explanation of this result centers on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners. The analysis casts light on the real effects of bank deregulation, on the insurance function of banks, and on the integration of bank markets.;The second study examines the impact of intrastate branching deregulation on self-employment income. Using a simple model adopted from Evans and Jovanovic (1989), It is hypothesized that banking deregulation would especially impact self-employment of discriminated against groups of the labor force. Consistent with the hypothesis, cross-state evidence suggests that the growth rate of self-employment income increased after reform, with the effect being more pronounced for women and minorities at the low end of income distribution. The main explanation of the result centers on the increased competition in the banking industry following deregulation, which may have mitigated 'taste-based' discrimination in lending.