Does the Geographic Expansion of Bank Assets Reduce Risk?

46 Pages Posted: 11 Dec 2014

See all articles by Martin Richard Goetz

Martin Richard Goetz

Leibniz Institute for Financial Research SAFE

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Ross Levine

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 2014

Abstract

We develop a new identification strategy to evaluate the impact of the geographic expansion of bank holding company (BHC) assets across U.S. metropolitan statistical areas (MSAs) on BHC risk. We find that the geographic expansion of bank assets reduces risk. Moreover, geographic expansion reduces risk more when BHCs expand into economically dissimilar MSAs, i.e., MSAs with different industrial structures and business cycles. We do not find that geographic diversification improves loan quality. Our results are consistent with arguments that geographic expansion lowers risk by reducing exposure to idiosyncratic local risks and inconsistent with arguments that geographic expansion, on net, increases risk by reducing the ability of BHCs to monitor loans and manage risks.

Keywords: Banking; Bank Regulation; Financial Stability; Risk; Hedging; Business Cycles; Industrial Structure

JEL Classification: G21; G28; G11

Suggested Citation

Goetz, Martin Richard and Laeven, Luc A. and Levine, Ross Eric, Does the Geographic Expansion of Bank Assets Reduce Risk? (December 10, 2014). Available at SSRN: https://ssrn.com/abstract=2536251 or http://dx.doi.org/10.2139/ssrn.2536251

Martin Richard Goetz (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ross Eric Levine

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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