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Deregulation, Market Structure, and the Demise of Old-School Banking

We construct novel network-based measures of U.S. state-level bank deregulation intensity that allow us to separately identify the effects of deregulation on competition and investment opportunities for the first time in the literature. In contrast to existing studies, we find that increased competition leads to higher deposit funding costs and a reduction in banks' net interest margins and profitability. In response, banks increase their risk-taking, shift their business models, and become more likely to be acquired by other banks. Our findings help to resolve conflicting evidence in the general deregulation literature and support bank deregulation theories in which reductions in bank charter values lead to increased bank risk-taking.