Incentive

Capital (architecture)

Financial system

Ecology

Financial stability

Biology

Exploit

Computer security

Archaeology

Economics

Market economy

Computer science

Business

Competition (biology)

Capital requirement

Monetary economics

Finance

Credit risk

Order (exchange)

Retail banking

History

Journal of Political Economy

How does banking competition affect credit provision and growth? How does it affect financial stability? In order to identify the causal effects of banking competition, we exploit a discontinuity in bank capital requirements during the nineteenth-century National Banking Era. We show that banks operating in markets with lower entry barriers extend more credit. The resulting credit expansion, in turn, is associated with additional real economic activity. However, banks in markets with lower entry barriers also take more risk and are more likely to default. Thus, we provide causal evidence that banking competition can cause both growth and financial instability.

The Effects of Banking Competition on Growth and Financial Stability: Evidence from the National Banking Era