Banking Regulation and Urban Growth,
RAND CORP SANTA MONICA CALIF
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The hypothesis advanced here is that the banking industry in a particular city may, over time, become relatively conservative with respect to its lending policies, and the resulting situation can be viewed as a type of disequilibrium. In the absence of banking regulation relatively risk-preferring investors would then be attracted into the banking industry, thus bringing the citys system of financial intermediaries to a new equilibrium. But entry restrictions erected by regulatory commisssions may prevent new entry and therefore tend to preserve a conservative banking industry. Evidence is presented demonstrating that St. Louis banking is in just this sort of disequilibrium -- that St. Louis banks are not only conservative when compared with other big-city banks, but have tended to become more so over time. This suggests that the supply of highrisk loans in St. Louis has been drying up. Therefore at least part of the citys failure over the last two decades to generate significant reinvestment after various economic setbacks may be attributed to banking regulation.
- Economics and Cost Analysis