Krishnan, K., Nandy, D. & Puri, M. (2014) “Small business productivity and access to financing“, VoxEU Organisation, 26 Σεπτεμβρίου.
The greater access to capital could increase small firms’ investment efficiency. Others argue that it may result in wasteful expenditures. This column discusses how small firms were affected by the Interstate Banking and Branching Efficiency Act of 1994, which allowed interstate banking. The authors find an increase in the productivity of firms located in states that allowed out-of-state banks to enter their borders. Smaller firms experienced a larger productivity increase, supporting of the effectiveness of a greater access to capital.
The Dodd-Frank act of 2011 included a clause that completely deregulated expansion by banks across state borders through opening up new branches. Some called this feature as a giveaway to big banks and detrimental for community banks. Others called this a boon for community banks, since they will be able to expand into newer markets at a lower cost. This debate, however, also feeds into the question of what will happen to small businesses when banks are free to expand across state borders.
In particular, free market proponents argue that free flow of capital leads to greater access of capital, allowing firms to invest efficiently. To the proponents of this argument, allowing banks to expand freely across geographic locations will enhance the efficiency with which capital is allocated to the most productive firms. Thus, firms can use more capital (or cheaper capital) to invest in productive projects that they would otherwise not have access to and enhance their productivity. On the other hand, it is also possible that firms may utilise this additional capital in wasteful expenditures (Jensen and Meckling 1976). This question has important policy implications, particularly when local, state, and national government budgets are stressed by economic conditions. For them, the pertinent question is how they can spur growth of local entrepreneurial firms.
The Interstate Banking and Branching Efficiency Act and firm productivity
In our forthcoming paper in the Review of Financial Studies (Krishnan, Nandy, and Puri 2014), we study how the interstate expansion of banking and bank branching allowed by the Interstate Banking and Branching Efficiency Act (IBBEA) starting in 1994 affected firm level productivity for small and large firms. Various regulations in the US restricted intra as well as interstate banking dating back to the 19th century. The McFadden Act of 1927 restricted cross-state banking and state level regulations prevented banks from intra-state expansions. Although banks tried to get around these regulations by forming multi-bank holding companies, the Douglas Amendment to the 1956 Bank Holding Company Act effectively prevented banks’ expansion across state borders, unless states explicitly permitted such expansion. However, states gradually dismantled these restrictions and many states had laws in place allowing interstate banking by 1992, which primarily took the form of allowing out-of-state banks to buy in-state banks. However, interstate bank branching was still not allowed until the passage of the Interstate Banking and Branching Efficiency Act of 1994.
Σχετικές αναρτήσεις:
- European Commission (2014) European Competitiveness Report 2014, Commission Staff Working Document SWD(2014)6319 final, Σεπτέμβριος.
- The Central Bank of Ireland (2014) “SME Market Report 2014 H1“, Eurosystem, Ιούνιος.
- Infelise, F. (2014) “Supporting Access to Finance by SMEs: Mapping the initiatives in five EU countries“, Financial Markets, ECMI Research Reports, CEPS, 23 Απριλίου.