Banking integration and growth: Role of banks' previous industry exposure

Using U.S. interstate banking deregulations, we identify the effect of market-entering banks’ prior industry exposures on the manufacturing sector growth in the new state that they enter. We create banking integration and industry specialization measures that consider both direct (state-pair) as well as indirect (tertiary-state) links created by expanding multi-bank holding company networks. First, consistent with the economic mechanism we have in mind, we observe that banks’ home state's industrial specialization is positively correlated with their lending specialization when participating to in-state as well as out-of-state syndicated loan markets. Then, focusing on industry value added at the state-industry-level, we find evidence consistent with the positive impact of market-entering banks’ prior exposure to a sector on the growth of that industry in the newly-entered state. The observed effect is larger when the state-pair-level discrepancy in sector-specialization is greater. Our findings are robust and hold in capital-related components of industry-level value added. We observe that the above results are more prominent in sectors that are more external finance dependent, have lower amounts of physical capital that can be pledged as collateral, generate more valuable patents, are durables-producers, and have a higher risk. Our findings suggest that a bank integration channel helps shape states’ industrial landscape.