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Does the geographic expansion of banks reduce risk?

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  • Goetz, Martin R.
  • Laeven, Luc
  • Levine, Ross
Abstract
We develop a new identification strategy to evaluate the impact of the geographic expansion of a bank holding company (BHC) across US metropolitan statistical areas (MSAs) on BHC risk. For the average BHC, the instrumental variable results suggest that geographic expansion materially reduces risk. Geographic diversification does not affect loan quality. The results are consistent with arguments that geographic expansion lowers risk by reducing exposure to idiosyncratic local risks and inconsistent with arguments that expansion, on net, increases risk by reducing the ability of BHCs to monitor loans and manage risks.

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  • Goetz, Martin R. & Laeven, Luc & Levine, Ross, 2016. "Does the geographic expansion of banks reduce risk?," Journal of Financial Economics, Elsevier, vol. 120(2), pages 346-362.
    • Handle: RePEc:eee:jfinec:v:120:y:2016:i:2:p:346-362
    DOI: 10.1016/j.jfineco.2016.01.020
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    More about this item

    Keywords

    Banking; Bank regulation; Financial stability; Risk; Hedging;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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