Does the Geographic Expansion of Bank Assets Reduce Risk?
46 Pages Posted: 11 Dec 2014
Date Written: December 10, 2014
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: Suggested Citation