Bank Diversification, Market Structure and Bank Risk Taking: Theory and Evidence from U.S. Commercial Banks

58 Pages Posted: 28 Aug 2015

See all articles by Martin Richard Goetz

Martin Richard Goetz

Leibniz Institute for Financial Research SAFE

Date Written: January 17, 2012

Abstract

This paper studies how a bank’s diversification affects its own risk taking behavior and the risk taking of competing, nondiversified banks. By combining theories of bank organization, market structure and risk taking, I show that greater geographic diversification of banks changes a bank’s lending behavior and market interest rates, which also has ramifications for nondiversified competitors due to interactions in the banking market. Empirical results obtained from the U.S. commercial banking sector support this relationship as they 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, Organization, Commercial Banks, Diversification, Competition

JEL Classification: G21, G32, L22

Suggested Citation

Goetz, Martin Richard, Bank Diversification, Market Structure and Bank Risk Taking: Theory and Evidence from U.S. Commercial Banks (January 17, 2012). FRB of Boston Risk and Policy Analysis Unit Working Paper No. 12-2. Available at SSRN: https://ssrn.com/abstract=2651161 or http://dx.doi.org/10.2139/ssrn.2651161

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

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