U.S. Banking Deregulation, Small Businesses, and Interstate Insurance of Personal Income





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    • Yuliya Demyanyk is at the Federal Reserve Bank of St. Louis. Charlotte Ostergaard is at the Norwegian School of Management and Norges Bank. Bent Sørensen is at the University of Houston and the CEPR. We thank an anonymous referee for very constructive comments. For further comments and discussions we thank the Editor, an anonymous Associate Editor, Allen Berger, Arnoud Boot, Ralf Elsas, Dmytro Holod, Joe Mason, Mitchell Petersen, Richard Rosen, and Stijn Van Nieuwerburgh, and seminar and conference participants at the University of Vienna, the University of Zurich, the 2004 European Finance Association Meetings in Maastricht, the 2004 University of Houston/Dallas Federal Reserve conference “International Financial Integration and Risk Sharing” in Houston, the 2005 CFS conference “Risk Transfer Between (Re-) Insurers, Banks, and Markets” in Frankfurt, the 2005 Econometric Society Meetings in Philadelphia, and the 2006 FIRS Conference on Banking, Corporate Finance, and Intermediation in Shanghai. We thank Pat Reilich and Lindsay Ludwig at the FDIC for help with Call Report data and Philip Strahan for sharing his measures of bank integration. Sørensen thanks Norges Bank for its hospitality. The views expressed in this paper are those of the individual authors and do not necessarily reflect the position of the Federal Reserve Bank of St. Louis or the Federal Reserve System.


We estimate the effects of deregulation of U.S. banking restrictions on interstate personal income insurance for the period 1970 to 2001. Interstate income insurance occurs when personal income reacts less than one-to-one to state-specific output shocks. We find that insurance improved after banking deregulation, with a larger effect in states where small businesses are more important and on proprietors' income than on other components of personal income. Our explanation centers on the role of banks as a prime source of small business finance and on the close intertwining of the personal and business finances of small business owners.