It is interesting how similar a business venture and a voyage in the sea is. With business the CEO and the rank and file workers have to face business cycles. With a voyage the captain and the crew has to face the wave of the sea. Usually with a larger ship, such as a cruise ship, the passenger feel less volatile ride. People going up and down in sync but the movement is usually gentler. With a small ship, however, the ride can be bumpy and seasick inducing. Two near by small ships may experience the opposite: while one is at the peak of the wave the other is at the trough. What would happen if we join the two small ships to form a larger ship? Take a look at the following research from Fed Reserve NY branch.
“Bank Integration and Business Volatility,” with Bertrand Rime and Philip Strahan (Staff Report no. 129, May 2001)
The authors investigate how bank migration across state lines over the last quarter century has affected the size and covariance of business fluctuations within states. Starting with a two-state version of the unit banking model in Holmstrom and Tirole (1997), they conclude that the theoretical effect of integration on business cycle size is ambiguous, because some shocks are dampened by integration while others are amplified. Empirically, Morgan, Rime, and Strahan find that integration diminishes employment growth fluctuations within states and decreases the deviations in employment growth across states. In other words, business cycles within states become smaller with integration but more alike. Their results for the United States bear on the financial convergence under way in Europe, where banks remain highly fragmented across nations.
We can learn some wisdom from the seafaring fellows.
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