The Benefits of Intrastate and Interstate Geographic Diversification in Banking

40 Pages Posted: 23 Feb 2014

See all articles by Céline Meslier

Céline Meslier

Universite de Limoges, LAPE

Donald P. Morgan

Federal Reserve Bank of New York

Katherine Samolyk

Consumer Financial Protection Bureau

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Date Written: February 21, 2014

Abstract

We estimate the benefits of intrastate and interstate geographic diversification for bank risk and return, and assess whether such benefits could be shaped by differences in bank size and disparities in economic conditions within states or across U.S. states. For small banks, only intrastate diversification is beneficial in terms of risk-adjusted returns but for very large institutions both intrastate and intrastate expansions are rewarding. However, in all cases the relationship is hump-shaped for both intrastate and interstate diversification indicating limits for banks of all size. Moreover, while our results indicate that the average 'very large' bank has already reached its optimal diversification level, the average 'small bank' could still benefit in terms of risk-adjusted returns from further geographic diversification. Higher economic disparity as measured by the dispersion in unemployment rates either across counties or states impacts the benefits of diversification. At initially low levels of diversification, moving to other markets with dissimilar economic conditions lowers the added value of diversification but it becomes more beneficial at higher diversification levels.

Keywords: Bank Holding Company; Geographic Diversification; Intrastate and interstate disparities in economic activity; Bank risk and return

JEL Classification: G21, G28

Suggested Citation

Meslier, Celine and Morgan, Donald P. and Samolyk, Katherine and Tarazi, Amine, The Benefits of Intrastate and Interstate Geographic Diversification in Banking (February 21, 2014). Available at SSRN: https://ssrn.com/abstract=2399417 or http://dx.doi.org/10.2139/ssrn.2399417

Celine Meslier (Contact Author)

Universite de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Donald P. Morgan

Federal Reserve Bank of New York ( email )

33 Liberty Street
Research Department
New York, NY 10045
United States
212-720-6573 (Phone)

Katherine Samolyk

Consumer Financial Protection Bureau ( email )

1700 G Street NW
Washington, DC 20521
United States
202-360-0522 (Phone)

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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