At VoxEU, Mathias Hoffmann, of the University of Zurich, and Iryna Stewen, of the University of Mainz, argue that moves to separate banks along national lines could have the opposite effect of that desired by policy-makers. That is, Hoffman and Stewen argue for more integration, not less. They use a simple graph to illustrate the relationship between bank liberalization and uninsured risk. The blue line represents banks that had not been liberalized at the time of the recession. The red line represents banks that had been liberalized.
Hoffman and Stewen:
Interestingly, the co-movement between interstate risk-sharing and the US-wide business cycle started to weaken during the 1980s, which is the period during which banking liberalisation at the state level got into full swing (in fact, the correlation between the blue line and the red, dashed line in Figure 1 is -0.44 before 1984 and only -0.13 thereafter).
We show that it is indeed the liberalisation of state bank branching restrictions that is responsible for this weakening. The role of banking liberalisation for risk-sharing is illustrated in Figure 2, which presents the extent of interstate risk-sharing that a state typically achieves in the years around a typical NBER business cycle trough. In Figure 2, we distinguish between two groups of states: Those that had already liberalised in a given recession (red dashed) and those that had not yet liberalised (blue solid line).
The message is clear – for the states that had not liberalised, consumption risk–sharing with other states drops sharply (the fraction of unshared risk goes up in the picture) in a recession, only to recover to 'normal' levels a year after. For the states that have already liberalised during the recession, the extent of risk-sharing with the US as a whole remains stable. In the paper, we then also show that these improvements in risk-sharing overall are actually driven by better access to credit markets (and not some other channel of smoothing or risk-sharing).
We believe that these results point towards an important benefit from banking liberalisation: Financial integration facilitates access to finance mainly when it is most urgently needed – during aggregate downturns.
Read Recessions and small business access to credit: Lessons for Europe from interstate banking deregulation in the US here.
02-20-2012 9:40 AM
Filed under: vox, banks, credit, VoxEU, Europe, bank regulation, austerity measures, risk, euro area, european banks, ecb, uninsured risk, global banking system, mathias hoffman, europe's banks, iryna stewen