Deregulation,Correspondent Banking,and the Role of the Federal Reserve |
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Institution: | 1. Cass Business School, London, United Kingdom;2. CEPR, United Kingdom;3. Bank for International Settlements, Basel, Switzerland;1. Smeal College of Business, The Pennsylvania State University, 381 Business Building, University Park, PA 16802, USA;2. Department of Finance, National University of Singapore, Singapore;3. J. Mack Robinson College of Business, Georgia State University, USA |
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Abstract: | Intrastate branching deregulation allowed correspondent banks to enter downstream retail deposit markets. Integrated correspondent banks may engage in vertical foreclosure, raising prices to downstream rivals or extracting valuable competitive information. The Federal Reserve would then tend to gain market share from private correspondent banks. Deregulation of restrictions on the formation of multibank holding companies, in contrast, allowed other correspondents to enter, increasing competition. We test these hypotheses using a panel data set of respondent account balances. We find that the Federal Reserve became a more important supplier of correspondent services following branching deregulation and that market power in the correspondent market declined following multibank holding company deregulation. Journal of Economic Literature Classification Numbers: D43, G21, G28, L11. |
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