Bank Organization, Market Structure and Risk-Taking: Evidence from U.S. Commercial Banks

Abstract

This paper studies how a bank’s diversification affects its own risk taking behavior and the risk taking of competing, nondiversified banks. In particular, I test whether greater geographic diversification of banks has effects on the risk taking behavior of nondiversified competitors beyond effects on risk due to competition. Empirical results obtained from the U.S. commercial banking sector indicate that a bank’s risk taking is lower when its competitors have a more diversified branch network. By utilizing the state-specific timing of a removal of intrastate branching restrictions in two identification strategies, I further pin down a causal relationship between the diversification of competitors and a bank’s risk taking behavior. These findings indicate that a bank’s diversification also impacts the risk taking of competitors, even if these banks are not diversifying their activities.

Keywords: Risk Taking, Competition, Commercial Banks, Diversification

JEL Classification: D23, D43, D82, G21, G28, L22