Does the Geographic Expansion of Bank Assets Reduce Risk?

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

Goetz, Martin Richard and Laeven, Luc A. and Levine, Ross, 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