Bank Competition and Entrepreneurial Gaps: Evidence from Bank Deregulation

I focused on bank financing due to its pivotal role in entrepreneurial activities. A lack of start-up capital has long been recognized as a major obstacle to business success, particularly for racial minorities. Existing research finds that start-ups rely more on bank financing than equity financing and that access to bank loans increases firm size and quality. Nevertheless, various studies indicate that minorities and women are disadvantaged in the lending market compared with white or male borrowers with similar creditworthiness. Furthermore, studies show that racial disparities in bank loans account for most of the racial gap in total financial capital. This underscores that reducing racial gaps in bank loans is a critical step toward addressing broader entrepreneurial disparities. Increased bank competition could bridge these gaps and reduce inequality by allocating capital to disadvantaged groups with promising projects.

I began my research by measuring changes in the supply of banking credit between 1994 and 2021 resulting from the Riegle–Neal Interstate Banking and Branching Efficiency Act (IBBEA) and the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank Act). The IBBEA, enacted in 1994, legalized interstate bank branching but allowed states to establish barriers to entry for out-of-state banks. However, several states gradually reduced these barriers. In 2010, the Dodd–Frank Act eliminated additional interstate branching restrictions nationwide. Using household-level data from the Census Bureau’s Survey of Income and Program Participation, my findings reveal that the deregulation of interstate branching reduced gender and racial gaps in entrepreneurship by lessening discrimination. After a state fully deregulated, the probability of women or members of minority groups becoming entrepreneurs increased by 1.2 percent relative to fully regulated states. This represents a 40 percent reduction in the gender gap in entrepreneurship and a 55 percent reduction in the racial gap. These reductions were more pronounced in states with higher levels of discrimination against women and minorities. Moreover, deregulation closed gaps to a greater extent in industries that depend more on external financing, suggesting that the relaxation of financial constraints narrowed these gaps.

Additionally, my research finds that bank deregulation reduced disparities in start-up capital by expanding and improving banking services. First, using data from the Federal Deposit Insurance Corporation, I found that bank deregulation increased the density of bank branches in counties with high proportions of minority borrowers. Household survey data confirm that bank competition increased the probability of financial inclusion for minorities relative to their white counterparts.

Second, I analyzed data from the Consumer Financial Protection Bureau (CFPB) to assess the quality of banking services, using the number of consumer complaints against banks for fraud, poor customer service, and misrepresenting products as a key metric. My findings reveal that deregulation improved the quality of banking services in zip codes with high minority populations.

Third, I reviewed complaints filed with the CFPB and found that increased competition reduced the frequency of discrimination complaints, especially in regions with a high proportion of minority consumers.

Fourth, I examined the effect of bank deregulation on firms’ performance and entrepreneurs’ accumulation of business equity. My research reveals gender and racial gaps in start-ups’ performance, consistent with existing research. However, it also shows that deregulating interstate branching reduced the performance gap between firms owned by male or white entrepreneurs and those owned by female or minority entrepreneurs. This effect was particularly prominent during the 2008 financial crisis, when credit was in short supply and exceptionally difficult to obtain. Addressing gaps in firm performance also reduced inequality in business equity and wealth. Disparities in business equity account for 49 percent of the gender wealth gap and 26 percent of the racial wealth gap. In fully deregulated states, narrowing gaps in business equity reduced wealth gaps by 12 percent relative to fully regulated states.

Note
This research brief is based on Xiang Li, “Bank Competition and Entrepreneurial Gaps: Evidence from Bank Deregulation,” Journal of Financial and Quantitative Analysis (September 2025): 1–35.