The Blessing and Curse of Deregulation

Deregulation affects incumbent firms through entry threats (a curse) and entry opportunities (a
blessing). To separate these effects, we construct novel network-based measures of U.S. state-level bank deregulation intensity that allow us to isolate the blessing- and curse-related effects of deregulation on incumbents’ outcomes for the first time in the literature. In contrast to existing bank
deregulation studies, we find that increased competition leads to higher deposit funding costs and
a reduction in banks’ net interest margins and profitability. In response, banks increase their risk-taking, shift their business models, and become more likely to be acquired. Our framework and
results bridge multiple literatures and support early bank deregulation theories in which reductions in bank charter values lead to increased risk-taking.