Effects of bank competition on life-cycle dynamics - Centraal by leader6

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									      Effects of bank competition on
      life-cycle dynamics of non-
      financial firms

                                       Nicola Cetorelli
                                       Financial Intermediation Function
                                       Research and Statistics Group
                                       Federal Reserve Bank of New York
The research in this paper was conducted while the author was Special Sworn Status researcher of the U.S.
Census Bureau at the center for Economic Studies. Research results and conclusions expressed are those of
the author and do not necessarily reflect the views of the Census Bureau. This paper has been screened to
insure that no confidential data are revealed.
Fundamental question

   What is the role of bank competition for the
    real economy?

   Important follow-up to previous question:
    does banking matter for economic growth?

   Dust settled on this question. Now focus is on
    how/why it matters
Why is this important?

   Interesting theoretical debate
       More bank competition → more credit available

                              → more entry, growth, etc.

       More competition → less incentive to develop
                       lending relationships →
                           → less credit (especially
        younger firms)
Why is this important?

   Another way to put it:
       More bank competition may increase quantity of
        credit available but at a cost of diminished quality
        (diminished allocational efficiency).
What do we know?

   More bank competition :
       More entry

       More growth

       Smaller average firm size

       Size distribution shifting to the left
What do we know?

   More bank competition has heterogeneous
    impact across industrial sectors

   More bank competition has heterogeneous
    impact across firms within a sector (small and
    large, young and old)
Still more to learn

   Approach from Corporate Demography angle

   Gain insights on industries using micro
    lenses:
     Understanding processes of organizational
     founding, growth, decline, transformation and
     mortality
Why?

   Refinement of theoretical conjectures
       More competition more entry. But then?

       Perhaps true more bank competition, less
        screening, more bad types in, worse capital
        allocation

       Hence, more entry, but higher mortality of
        younger firms
Why?

   Refinement of theoretical conjectures
       Also, more bank competition, perhaps change in
        whole “types” distribution: if easier credit
        available, new organizations can be founded with
        weaker “gene pool”.

       Obsolescence of incumbents: under new
        environments, firms established prior to bank
        deregulation have harder time to adjust, hence
        more frail.
Why?

   Refinement of theoretical conjectures
       Diminished senescence: more bank competition,
        weaker lending relationships, diminished chance
        for weak, decaying firms to be kept alive.

        More competition for credit favors a healthy
        process of creative destruction in industries.
What I do

   Study impact of deregulation of state-specific
    branching restrictions in the United States.
    Bulk of deregulation occurs between 1970
    and 1994.

   Much evidence that removal of restrictions
    significantly improved bank competition.
What I do

   Main question:
       How did bank deregulation affect the vital rates of
        non-financial enterprises?
Results

   Bank deregulation had pervasive, structural
    impact on life-cycle dynamics of non-financial
    industries.

   Change can be defined as “environmental
    imprinting”.
Data

   Longitudinal Business Dataset (U.S. Bureau
    of the Census).
       Universe of U.S. business establishments.
       Panel 1976 – 2005
       Total of more than 7,000,000 records for
        approximately 1,000,000 individual
        establishments.
          Unconditional hazard
               Smoothed hazard estimate
.09
.08
.07
.06
.05




      0          10                   20   30
                      analysis time
.04
Results

   Unqualified statement:
       hazard of death is reduced after deregulation

   Qualified statement:
       hazard of death of firms born prior to deregulation
        is reduced after deregulation

       hazard of death of firms born after deregulation is
        increased after deregulation
Results

   Unconditional negative duration dependence,
    but:
       Duration dependence turns positive for firms born
        after deregulation. Consistent with hypothesis of
        reduced senescence.

   Firms born prior to deregulation display a
    “thicker skin”. Evidence against hypothesis of
    liability of obsolescence.
                  Predicted hazard.
Firms born before deregulation and surviving after vs.
            firms born after deregulation
.4




                                    Born-after firms
.3
.2




                                                       born before
                                                       survival firms
.1
 0




     0            10                         20             30
                 survival time at end of interval

                            p2               p3
Conclusions

   Bank deregulation has pervasive, structural
    impact on real economy
   Deregulation left environmental imprinting
       Firms born in new regime of “easier” credit (post-
        dereg) may be more frail
       Imprinting did not cause obsolescence of
        incumbents born in previous regime
       Reduced senescence → healthier life-cycle
        dynamics
Conclusions

   The normative implications of a change in
    bank competition are not that straightforward.
   Ultimately, more bank competition may be
    indisputably a good thing, leading to a
    superior equilibrium. But the process to get
    there may be painful for some.

								
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