Inaugural Lecture

1
The Impact of Bank Deregulation on the Real
EconomyNicola Cetorelli(Federal Reserve Bank
of New York)
Discussion by Hans Degryse (CentER-Tilburg
University, TILEC and K.U. Leuven TILEC-AFM Chair
on Financial Market Regulation) Competition
workshop on Banking Den Haag, January 31st,
2008

2
Issue Does Finance affect Real Economy

• Is Financial Intermediation important for
  economic growth?
• Are banks important for economic growth?
• Is banking competition important for economic
  growth
• No see e.g. Robinson (1952), or Lucas (1988)
• Yes
• Banks facilitate problems inherent in imperfect
  capital markets (see e.g. Levine (2005) in
  Handbook of Economic Growth)
• Banks are most important, if not unique,
  providers of external finance to SMEs, and SMEs
  are engine of growth

3
Summary of paper Finance and growth Causality

• Must read as very nice part on establishing
  causality between finance and growth
• First studies
• cross-country evidence finding that growth and
  financial depth are positively correlated (King
  and Levine (1993))
• Bank credit and growth positively correlated
  (Levine and Zervos (1998))
• Issues of endogeneity and size of financial
  development
• IV
• Bank-Branch Deregulation Jayaratne and Strahan
  (JF1996) (time and cross-sectional variation)
• Rajan Zingales financial dependence
• Contiguous counties with similar infrastructures
  (Huang (JFEforth)) effect of deregulation is
  only limited
• Further work on firm growth, and firm size
  distribution using this framework might further
  nail the issue of causality

4
Bank Competition Good or Bad?

• Bank competition good or bad? In search for the
  one-handed economist
• Good
• standard channel suggests lower prices and
  greater availability of credit
• gt small firms may benefit more as they have
  fewer alternatives and depend more on banks
• Impact on bank firm relationships
• More competition induces more relationship
  banking (as investing in relationships is a way
  for banks to differentiate their product) (Boot
  and Thakor JF2000 Elsas JFI2005, Degryse and
  Ongena JFI2007)
• Spagnolo (2000)
• link between banking and product markets
• Impact of competition on existing relationships
• more competition lowers entry barriers and allows
  banks to focus more on small and new firms as
  banks do not destroy franchise value
• Bad
• Competition is bad as banks may not be willing to
  make relationship specific investments (Petersen
  and Rajan (QJE1995))
• Competition should hurt in particular small firms
• gt new entry should be less, higher average size
  and a lower prevalence of small firms when
  banking competition is more intense
• See, Degryse H. and S. Ongena, 2007, Competition
  and regulation in retail banking Background
  paper, in Competition and Regulation in Retail
  Banking, OECD Competition Committee Roundtable
  69, pp.15-58.

5
Findings in Cetorellis (JF, JF, JMCB, WP) papers

• Identification strategy interaction of
  competition and external financial dependence
• Three indicators of banking competition
• HHI based on deposit market shares in MSA
• Branching deregulation indicator
• Interstate banking deregulation indicator
• External financial dependence based on mature
  Compustat firms
• Deregulation leads to
• Greater entry and smaller size in dependent
  industries (as in Black and Strahan (JF2002))
  (about 10)
• Size distribution shifts to the left (so
  proportionally more firms up to 100 employees)
• Lower concentration not only new entrants
  benefit but also small incumbents
• Bank deregulation only good for the small
  incumbents
• Branching deregulation only affects small
  entrants

6
Findings in Cetorellis (JF, JF, JMCB, WP) papers

• Deregulation leads to
• Impact on job creation and job destruction
• Bank deregulation (?) increases job creation in
  start-ups
• Lower rates of job destruction for middle aged
  companies
• Hazard of mortality are higher for firms which
  are born after bank deregulation

7
Comments on Cetorellis (JF, JF, JMCB, WP) papers

• Banking Deregulation in US
• Evidence establishes link between finance and
  real economy
• However, contiguous counties approach as in Huang
  (JFEforth) might be a triple difference in
  difference approach
• How to link results to Petersen and Rajan (1995)
  findings?
• Has it to do with endogeneity of market structure
  / different time periods / stability of results?
• Normative Should the banking sector be more
  deregulated or not? What is optimal degree of
  regulation?

8
Comments on Cetorellis (JF, JF, JMCB, WP) papers

• Banking Deregulation in US
• Is it really deregulation which is driving the
  result?
• Role of bank size
• Small banks and small firms team up due to
  dealing with soft information (Berger et al
  (JFE2005))
• Role of Lending Technology
• Relationship versus transactions based
• Does deregulation affect other banking system
  characteristics?
• Lower barriers to entry and fewer activity
  restrictions lead to less banking fragility Beck,
  Demirguc-Kunt Levine (2004)
• Dynamic effects good banks should survive
  following deregulation Stiroh Strahan (JMCB
  2003)
• Normative Should the banking sector be more
  deregulated or not? What is optimal degree of
  regulation?

9
Comments on Cetorellis (JF, JF, JMCB, WP) papers

• Implications for banking systems and optimal
  regulation in other countries?
• How to read this evidence?
• Should we remove all regulation in banking
  sector?
• Important differences in foreign entry
  restrictions and government ownership

10
Comments on Cetorellis (JF, JF, JMCB, WP) papers
11
Minor Comments

• Improve
• Numbering of tables
• Reference to economic significance in Table 2
• Table 2 references to tables in your JF/JMCB
  papers
• Reference to Spagnolo (2000)
• Improve uniqueness of concepts throughout text
  e.g. banking deregulation in job destruction/
  creation part