The relaxation of entry barriers in the banking industry: An empirical investigation

Until recently, state laws restricted entry into local banking markets in m any states by limiting both branching and multibank holding company (MBHC) operations. To the extent that these laws impeded entry into local banking markets, the removal or relaxation of the restrictions should have reduced barriers to entry, leading to more competitive price levels in the affected markets. This paper tests for such effects by examining the changes in dep osit interest rates offered by banks operating in markets affected by liber alization of state banking law relative to the changes in deposit interest rates offered during the same time period by banks operating in markets not affected by such liberalization. We rnd evidence that liberalization of st ate laws restricting intrastate MBHC operations, interstate branches, and i nterstate MBHC operations caused deposit interest rates to become more comp etitive. We, however, rnd no evidence of such effects associated with the r emoval of restrictions on intrastate branching.