ABSTRACT We show that interstate bank branching deregulation in the United States led to a substantial and persistent decline in small business lending, driven by a reallocation of deposits away from local relationship lenders and toward large, out‐of‐state entrants. Lending to small businesses fell by over 5% in affected areas, with dynamic estimates revealing persistent declines of just under 10% in the medium run. The sharpest declines occurred in counties with larger deposit bases and stronger housing markets, suggesting that entering banks prioritized deposit acquisition and mortgage lending over relationship‐based small business credit. This funding disruption triggered lasting real effects: dynamic estimates suggest the number of small firms declined by approximately 5% relative to prederegulation levels, and employment at the smallest firms fell significantly. Our findings highlight a deposit channel through which deregulation can dislocate credit and reshape local business landscapes, even when aggregate banking activity ultimately stabilizes.
Cannon et al. (Tue,) studied this question.