Banking Regulation and Urban Growth.

Demonstrates that the economic growth of a city depends in part on the availability of relatively high-risk loans from local banks. But the banks of a particular city may, over time, become relatively conservative with respect to lending policies, and the resulting situation can be viewed as a type of disequilibrium. In the absence of banking regulation, relatively risk-preferring investors would be attracted into the banking industry, thus bringing the city's system of financial intermediaries to a new equilibrium. But entry restrictions erected by regulatory commissions may prevent new entry and therefore tend to preserve a conservative banking industry. Evidence is presented demonstrating that St. Louis banking is in just this sort of disequilibrium--that St. Louis banks are not only conservative when compared with other big city banks, but have tended to become more so over time. This suggests that the supply of high-risk loans in St. Louis has been drying up. Therefore at least part of the city's failure over the last two decades to generate significant reinvestment after various economic setbacks may be attributed to banking regulation. (A briefing paper for St. Louis, Missouri, policymakers.) 29 pp. Ref.