THE POLITICAL-ECONOMY OF BRANCHING RESTRICTIONS AND DEPOSIT INSURANCE- A MODEL OF MONOPOLISTIC COMPETITION AMONG SMALL AND LARGE BANKS

This article suggests that the introduction of bank branching restrict ions and federal deposit insurance in the United States likely was mot ivated by political considerations. Specifically, we argue that these restrictions were instituted for the benefit of the small unit banks t hat were unable to compete effectively with large, multiunit banks. We analyze this ''political hypothesis'' in two steps. First, we use a m odel of monopolistic competition between small and large banks to exam ine gains to the former group from the introduction of branching restr ictions and government-sponsored deposit insurance. We then find stron g evidence for the political hypothesis by examining the voting record of Congress.