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Finance and Economics Discussion Series
Divisions of Research & Statistics and Monetary Affairs
Federal Reserve Board, Washington, D.C.
Branch Banking, Bank Competition, and Financial Stability
Mark Carlson and Kris James Mitchener
2005-20
NOTE: Staff working papers in the Finance and Economics Discussion Series (FEDS)
are preliminary materials circulated to stimulate discussion and critical comment. The
analysis and conclusions set forth are those of the authors and do not indicate
concurrence by other members of the research staff or the Board of Governors.
References in publications to the Finance and Economics Discussion Series (other than
acknowledgement) should be cleared with the author(s) to protect the tentative character
of these papers.
Branch Banking, Bank Competition, and
Financial Stability
Mark Carlson
and
Kris James Mitchener*
March 2005
JEL Codes: G21, N22, E44
It is often argued that branching stabilizes banking systems by facilitating diversification of bank
portfolios; however, previous empirical research on the Great Depression offers mixed support
for this view. Analyses using state-level data find that states allowing branch banking had lower
failure rates, while those examining individual banks find that branch banks were more likely to
fail. We argue that an alternative hypothesis can reconcile these seemingly disparate findings.
Using data on national banks from the 1920s and 1930s, we show that branch banking increases
competition and forces weak banks to exit the banking system. This consolidation strengthens the
system as a whole without necessarily strengthening the branch banks themselves. Our empirical
results suggest that the effects that branching had on competition were quantitatively more
important than geographical diversification for bank stability in the 1920s and 1930s.
*
Carlson: Federal Reserve Board; 20th and Constitution Ave, NW; Washington DC 20551;
Mark.A.Carlson@frb.gov....