Geographical Segmentation of Us Capital Markets

Is the US capital market segmented geographically? If so, does segmentation affect economic outcomes? This paper attempts to answer these questions using demographic variation in savings. A large fraction of seniors has a positive effect on the local volume of bank deposits and local loan supply. Using the fraction of seniors as an instrument I show that the supply of deposits has a strong positive effect on local economic outcomes. The results are robust to variation in the definition of local market, and to the inclusion of controls for local wealth, as well as the use of lagged demographic variables. Other effects of an older population, such as low crime rates, cannot explain the findings. I present evidence that segmentation is stronger in markets where banks are small and lack access to external capital markets. Finally, deregulation of intrastate branching cut the effect of local deposit supply in half, suggesting that a benefit of deregulation is improved geographical capital allocation