Finance as a Barrier to Entry: Bank Competition and Industry Structure in Local U.S. Markets




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    • Cetorelli is at the Federal Reserve Bank of New York and is a fellow at the Wharton Financial Institutions Center. Strahan is at Boston College and is a fellow at both the Wharton Financial Institutions Center and the NBER. Most of the work was done while the first author was at the Federal Reserve Bank of Chicago. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Banks of Chicago and New York, or the Federal Reserve System. We thank an anonymous referee for very helpful comments. We also thank Jeremy Stein, Luigi Zingales, and seminar participants at Boston College, the Federal Reserve Banks of Chicago and New York, Ente Einaudi, Wesleyan University, and UC Davis for their inputs.


This paper tests how competition in local U.S. banking markets affects the market structure of nonfinancial sectors. Theory offers competing hypotheses about how competition ought to influence firm entry and access to bank credit by mature firms. The empirical evidence, however, strongly supports the idea that in markets with concentrated banking, potential entrants face greater difficulty gaining access to credit than in markets in which banking is more competitive.