financially dependent " ) tend to grow faster than " cash cow " industries ( that is, those that can finance investment with internally generated funds ). 8 other research that i have been involved with examines the consequences of banking crises across different types of industries. in particular, this work finds that bank crises have a disproportionately negative effect on financially dependent firms in countries with well - developed financial systems : in such systems, the financially dependent firms grow faster in normal times but are hit harder in crisis times, a difference suggesting that the banking system plays a critical role in overall economic performance ( kroszner, laeven, and klingebiel, forthcoming ). rajan and zingales ( 1998 ) and cetorelli and gambera ( 2001 ). in addition, levine, loayza, and beck ( 2000 ) shows that the exogenous component of banking development is positively related to economic growth. the state - by - state deregulation of branching and banking restrictions provides a useful laboratory for investigating the effect of better banking on economic growth. because states share a common legal system and broadly similar institutional environments, we can investigate the response of the state economy to policy changes that lead to more - efficient finance. a number of studies give a consistent answer : state economic performance measured in a variety of ways improves after the deregulation of geographic restrictions on banking ( for example, kroszner and strahan, 2006 ; stiroh and strahan, 2003 ; black and strahan, 2001 ; jayaratne and strahan, 1998 ; and jayaratne and strahan, 1996 ). these results have important implications for the policy debate in europe and around the globe. first, after controlling for other factors, data on state - level economic performance over the period 1972 to 1992 suggests that state - level branching deregulation spurred faster economic growth ( jayaratne and strahan, 1996 ). second, evidence from 1976 to 1994 shows that state - level employment growth accelerated after the deregulation of intrastate branching as well as after the deregulation of interstate banking ( kroszner and strahan, 2006 ). third, if more competitive banking really spurs growth, we would expect particularly large benefits among relatively bank - dependent sectors of the economy, such as small firms or entrepreneurs. in work with strahan, i have found that the rate of new business incorporation increases significantly after branching der

experience with geographic deregulation provides some valuable lessons for the european union, so let me turn to that experience now. origins and deregulation of geographic restrictions in the united states restrictions on the geographic expansion of banks have a long history in the united states. because the u. s. constitution prevents states from issuing paper money and from taxing interstate commerce, the states used their power to grant bank charters to generate a substantial part of state revenues ( sylla, legler, and wallis, 1987 ). a state received no charter fees from banks incorporated in other states, so states prohibited out - of - state banks from operating in their territories - - hence the prohibition on interstate banking originated in the states themselves and as a fiscal strategy rather than as a matter of optimal policy for banking and consumers. in addition, states restricted the ability of banks to expand geographically within their borders, effectively creating a series of local monopolies from which state governments could extract at least part of the rents. some state legislatures even passed " unit banking " laws, which prevented a bank from having any branches at all. in 1927, the congress passed the mcfadden act, which clarified the authority of the states over national banks'branching within their borders. although some branching restrictions were removed in the 1930s, most states continued to enforce restrictions into the 1970s. between 1970 and 1994, however, most states relaxed their restrictions on branching, typically in a two - step process. first, states permitted multibank holding companies to convert subsidiary banks ( existing or acquired ) into branches. the holding companies could then expand geographically by acquiring banks and converting them into branches of one of their existing bank subsidiaries. second, states began permitting de novo branching, whereby banks could open new branches anywhere within state borders. figure 1 describes the timing of intrastate branching deregulation across the states. in addition to limiting branching within a state, states prohibited cross - state ownership of banks until the 1980s. although some banks attempted to circumvent the mcfadden act by building multibank holding companies with operations in many states, the congress stopped them with the 1956 amendments to the banking holding company act. starting in 1978, states began to pass " reciprocity " laws in which a state would allow entry by bank holding companies from other states if, in return, bank holding companies from the state were permitted to enter the other states. by 1992, all states but hawaii had passed such laws. the transition to full interstate banking was completed