Branching Out: Capital Mobility and Long-Run Growth

Our research examines this question by studying the first wave of state-level bank branching reforms in the United States. In the 1930s, many states legalized bank branching, which allowed banks to operate multiple offices within a state. Advocates argued that branching would channel capital from financial centers to underserved areas, but critics feared it would concentrate network resources in already well-developed urban centers, worsening existing disparities. By 1940, states that legalized branching saw their share of bank offices in branch networks rise from near zero in 1920 to over 40 percent. By the eve of the more recent wave of deregulations in the 1970s, approximately 70 percent of bank offices were part of a branch network. Studying the adoption of these initial branching reforms allowed us to examine how introducing bank branch networks during the Great Depression shaped seven decades of capital flows and economic growth.

Our study shows that states that legalized branching during the 1930s experienced persistent changes to their banking markets. States with extensive branching in 1940 still saw stronger growth in the number of bank offices in 1990 than states that had not introduced branching by 1940. These states also experienced long-run gains in manufacturing productivity (as measured by output value minus material costs per worker), as evidenced by all censuses from 1940 to 2000. 

This productivity growth could have come from three sources: an increase in capital per worker, technological improvements, and/​or improved allocation of financial resources across firms and locations. Regarding the first source, our research finds little evidence that these productivity gains were due to state-level increases in financial capital per worker, as measured by total and per capita deposits and lending. Our findings also show no meaningful changes in manufacturing employment or physical capital accumulation. Lastly, our findings reveal no evidence that branching reforms led to technological advancement, as measured by patenting activity, suggesting that changes in resource allocation were the primary explanation for the increase in productivity.

Motivated by these state-level findings, we assessed the role of capital reallocation using bank and branch-level balance sheet data from 1937. These records come from the only time, to our knowledge, that US regulators required branch-level reports from both state and national banks. This unique dataset offers rare insight into how capital moved within and between banks, allowing us to directly compare the funding and asset allocation strategies of branch and stand-alone banks after accounting for bank size, regulatory constraints, and location.

These data show that branch networks, unlike stand-alone banks, used their internal capital markets to channel funds to the most capital-constrained counties they served. Improving capital allocation in this fashion could plausibly raise manufacturing productivity without increasing state-level credit supply. Branch banks’ capital deployment differed from that of stand-alone banks despite having similar funding sources, as measured by deposits, shareholder equity, and interbank borrowing. Stand-alone banks invested a much larger share of their portfolios in traded securities, whereas branch banks allocated more of their assets toward loans to firms and households. This shift toward lending by branch banks did not, however, increase financial capital per worker because branch networks absorbed stand-alone banks, thereby reducing the total number of banks.

Our office-level balance sheet data provide three pieces of evidence that branch networks reallocated funds between branches to relax local financial constraints. First, branch networks systematically redistributed deposits within their organizations, so some branches lent high shares of their assets while others primarily raised deposits. Second, these patterns of specialization were economically meaningful: Branch offices located in capital-constrained counties (as measured by high manufacturing output relative to mechanical power) were twice as likely to receive funding on net from other banks and branches than comparable stand-alone banks in the same areas. Third, only branches in capital-constrained areas allocated more of their assets to nonbank lending relative to other bank offices.

Our balance sheet analysis shows that the structure and reach of branch networks altered capital flows and local credit supply. Consequently, standard measures of local availability of financial capital, such as bank presence or local deposits, fail to capture this capital mobility factor and its benefits. We addressed this issue by developing a new metric, deposit market access (DMA), which quantifies the pool of capital that could be deployed in a local market based on the geographic reach of the branch networks operating there. Our research finds a positive relationship between branching and DMA growth, particularly in capital-constrained counties. This reinforces our finding that branch networks improved capital allocation by directing funds to where they were most scarce, a function that stand-alone banks could not perform.

Furthermore, counties’ DMA growth strongly predicted their subsequent manufacturing productivity growth. Manufacturing productivity grew across the country following branching reforms, but a gap between counties with high and low DMA growth emerged after 1937 and persisted. The gains were driven by counties that were financially constrained before the reforms, as measured by local deposits per capita. We found similar results when we compared adjacent counties located across state lines that differed in their adoption of branching reforms. Together, our findings provide evidence that the institutional structure of branching—rather than simply expanded banking access—improved capital allocation and integrated financial markets to fuel manufacturing productivity growth, especially in underserved areas.

Note:
This research brief is based on Sarah Quincy and Chenzi Xu, “Branching Out: Capital Mobility and Long-Run Growth,” National Bureau of Economic Research Working Paper no. 34457, November 2025.