Softening the blow: US state-level banking deregulation and sectoral reallocation after the China trade shock

US state-level banking deregulation during the 1980s facilitated the sectoral reallocation of labor after the China trade shock. Early-deregulated regions were financially more integrated by the 1990s, allowing households to better smooth consumption by borrowing against their housing equity. This stabilized demand, kept the price of housing up, and thus facilitated sectoral reallocation of labor from import-exposed manufacturing toward housing. Using granular bank-county-level data, we show that early deregulation led to a stronger presence of geographically diversified (“integrated”) banks, which responded more elastically than local banks to households’ increased borrowing demand. We show how household access to finance matters for adjustment after asymmetric terms-of-trade shocks in monetary unions, particuarly when labor mobility is limited.