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Title: Financial Liberalization and Bank Failures: The United States Free Banking Experience

Citation Type: Miscellaneous

Publication Year: 2012

Abstract: We examine the impact of removing barriers to bank entry on bank failures exploiting the introduction of free banking laws in US states during the 1837-1863 period. Focusing on this historical event allows us to: (1) rule out the confounding effects of state implicit guarantees; (2) identify the causal relation using contiguous counties on the border of states with different regulation. Our main finding is that counties in free banking states experienced significantly more bank failures. We also provide evidence that the individual probability of failure of both incumbent and entering banks was significantly higher in free banking states. We argue that the destabilizing effect of free banking is consistent with the view that bank competition leads to more risk taking. Our results suggest that the introduction of free banking led to more bank entry and caused a significant drop in the market share of incumbent banks.

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Authors: Ager, Philipp; Spargoli, Fabrizio

Publisher: Universitat Pompeu Fabra

Data Collections: IPUMS NHGIS

Topics: Other