Banks and factories.

The structure of the banking system, it seems likely enough, will have an influence on how industry start, grow, decline, and die. One thought, according to Nicola Cetorelli in the Federal Reserve Bank of St. Louis Review, is that less competitive banking might favor new firms in the expectation that big banks would be able to secure "rents" when such firms turn profitable. Or, Cetorelli points out, more competitive banks might be the ones to seek out such new business.

Cetorelli uses data from the Longitudinal Research Database the Census maintains for manufacturing establishments, earlier studies of bank deregulation, and data from the Federal Deposit Insurance Corporation to study this issue carefully. The results tended to favor the second hypothesis. Bank deregulation has a significant positive impact on the rate of job creation in new establishments and bank concentration has a significant negative impact on the growth of employment in new firms relative to total employment. Taken together, says Cetorelli, this might even suggest that market power on the part of banks might be a barrier to entry.

As manufacturing establishments become "middle aged"--2 to 10 years old--banking competition has little effect on job creation, but deregulation is associated with lower rates of job destruction. As manufacturers evolve into "mature" firms--over 10 years old--Cetorelli finds that some of these relationships change. Specifically, bank concentration becomes positively associated with expansion.

"More competition in banking," says Cetorelli, "appears to promote job creation among industrial establishments at the start-up stage and to permit them to prosper in the immediate wake of their entry into the market." As a result, more bank competition may tend to encourage an industrial structure with more new firms and higher proportions of total employment in younger establishments.