How Local Bank Competition Boosts the Economy

Tuck professor finds evidence that having more local banks is good for business.

Read the full story by Kirk Kardashian, published by the Tuck School of Business.

A new paper by Gordon Phillips, the C.V. Starr Foundation Professor at Tuck, sheds more light on the question of how bank deregulation affects economic growth. In “The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity,” which is forthcoming in The Journal of Finance, Phillips and co-authors John Bai of Northeastern University and Daniel Carvalho of Indiana University examine U.S. Census data on half a million small firms between 1977 and 1993 to better understand the impact of bank deregulation on their ability to borrow money and reinvest it in their business.

Bank financing, or corporate debt, often comes with a negative connotation. People worry that firms in debt must forego new business opportunities or can’t invest in research and development. But for smaller businesses, debt can be a catalyst for fast growth. That’s what Phillips found when he looked at the small firms that suddenly had access to competitive interest rates when, after deregulation, new banks moved into local markets and began looking for business. “The existing small banks didn’t have as much capital and didn’t offer competitive rates,” Phillips says, “so when the national banks came in, they actually made it easier for local firms to borrow money.”