Branch Banking as a Device for Discipline: Competition and Bank Survivorship during the Great Depression

Because California was a pioneer in the development of large-scale branching, we use its experience during the 1920s and 1930s to assess the effects of branching on competition and on the stability of banking systems. Using individual bank balance sheets, income statements, and branch establishment data, we show that smaller incumbent banks responded to the entry of a large branch bank by adjusting their operations in a manner consistent with increased efficiency. Competition from branching networks also produced an externality: unit banks exposed to this competition were more likely to survive the Great Depression than banks not exposed to it. (c) 2009 by The University of Chicago. All rights reserved..