In the United States, commercial banks have not been free to expand geographically.  Indeed, branch and banking restrictions in the United States date back to the beginning of commercial banking.  State authorities controlled bank charters and had incentive to limit the number of charters because of the higher taxes and fees they could extract from existing banks.  Further, there were no benefits to state authorities to allow banks outside of their state to establish a bank presence through branching.  Consequently, many states prohibited intrastate and interstate branching and banking very early in the nineteenth century, if not earlier. 

While many bankers, particularly small, unit bankers, opposed most opportunities for geographic expansion in commercial banking, the larger banker sought opportunities to enter new markets and to expand in size and scope.  The debate and battle between the large and small banker on the branch issue played out over a period in excess of two hundred years.  Some experts expected the debate to end in 1994 with the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA).  While the IBBEA removed regulatory barriers to interstate banking, it left significant discretion to the states regarding interstate branching.  Because of this, the small banker continued to fight to keep interstate branching at bay in the years immediately following the passage of IBBEA.  Despite their efforts, all states ultimately opted to allow for interstate branching in one form or another.

Very few states allowed for interstate branching in 1994. Thus, the real importance of the IBBEA was not in regard to interstate banking but, rather, to interstate branching.  Further, while the IBBEA removed remaining limits to interstate banking, it gave state authorities an opportunity to determine specific parameters to interstate branching.  Branching restrictions impact banks in several ways: they may alter banks’ risk taking behavior; bank performance; and the market structure in which banks operate.  To the extent that states chose to adopt restrictive provisions, barriers and restrictions to interstate branching remain.  The purpose of this paper is to test the hypothesis:  Banks in states that embraced interstate branching in the post IBBEA era performed better than banks in states that opted for continued restrictions to interstate branching. This paper uses state level data for all fifty states between 1992 and 2008 to test the hypothesis.  The model is expected to explain four different ratios of bank performance with independent variables including the prime rate, gross state product, and control variables for different branch banking provisions in each state.  The expectation is that the regression results will show that the more limits on branching, the less favorable is bank performance.  In other words, we expect to find that more free branching environments create more opportunities for banks to be successful.