Bank regulation and monetary policy transmission: Evidence from the US States liberalization

This paper studies the impact of geographic banking restrictions on monetary policy trans-mission. Exploiting the staggered state-level deregulation of U.S. banking from the late 1970s to the early 1990s, we find that interstate deregulation sharply increased the responsiveness of bank lending to monetary shocks, nearly doubling it. The effect occurred primarily for small and illiquid banks, pointing to a strengthening of the bank lending channel of monetary transmission. We find that this is especially due to a lower propensity of small banks affiliated with complex bank holding companies to insulate borrowers from monetary contractions.