Competition and Bank Opacity

We assess the impact on bank opacity of bank regulatory reforms that spurred bank competition. We begin by exploiting three sources of variation in the removal of regulatory impediments to bank competition among U.S. banks during the last quarter of the 20th century. First, individual states eliminated restrictions on intrastate branching. Second, interstate bank deregulation eased regulatory impediments to bank holding companies (BHCs) that are headquartered in one state establishing subsidiaries in other states. Third, in response to the Riegle-Neal Act of 1994, which eliminated intrastate branch and interstate bank restrictions, states had leeway in the timing of interstate branch deregulation. We show that deregulation-induced competition reduced opacity, not the quality of loan portfolios. Moreover, we discover that both the BHC-specific and the subsidiary-level measures of regulatory-induced competition are strongly and negatively associated with discretionary LLPs.

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