The Blessing and Curse of Deregulation

79 Pages Posted: 29 Oct 2019 Last revised: 2 Nov 2020

See all articles by Emilio Bisetti

Emilio Bisetti

Hong Kong University of Science and Technology (HKUST)

Stephen A. Karolyi

Office of the Comptroller of the Currency

Stefan Lewellen

Pennsylvania State University - Department of Finance

Date Written: August 12, 2020

Abstract

Deregulation affects incumbent firms through entry threats (a curse) and entry opportunities (a
blessing). To separate these effects, we construct novel network-based measures of U.S. state-level bank deregulation intensity that allow us to isolate the blessing- and curse-related effects of deregulation on incumbents’ outcomes for the first time in the literature. In contrast to existing bank
deregulation 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. Our framework and
results bridge multiple literatures and support early bank deregulation theories in which reductions in bank charter values lead to increased risk-taking.

Suggested Citation

Bisetti, Emilio and Karolyi, Stephen A. and Lewellen, Stefan, The Blessing and Curse of Deregulation (August 12, 2020). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3475458 or http://dx.doi.org/10.2139/ssrn.3475458

Emilio Bisetti (Contact Author)

Hong Kong University of Science and Technology (HKUST) ( email )

Clear Water Bay, Kowloon
Hong Kong

Stephen A. Karolyi

Office of the Comptroller of the Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

Stefan Lewellen

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

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