In this study, Sudipta Basu analyzes how increased bank competition affects the operating risks of nonfinancial firms. By exploiting the staggered regulatory reforms in the 1990s that allowed interstate banking and branching, he shows that out-of-state bank entry was associated with lower borrower risk-taking on average.
Further analysis shows that large, profitable, and geographically diversified firms were likelier to switch to new, large banks. These banks offered larger and cheaper loans, which reflected their higher efficiency and risk reduction through geographical diversification.
Firms that began borrowing from these new entrant banks increased their capital expenditures and project-specific financing. At the same time, they kept their R&D expenses stable while reducing the associated risks. In contrast, firms that continued borrowing from incumbent banks faced higher interest rates and increased risk, implying a decline in credit access. States that implemented more extensive deregulation had greater changes in these outcomes.