Does the Geographic Expansion of Banks Reduce Risk?

45 Pages Posted: 18 Apr 2016

See all articles by Martin Richard Goetz

Martin Richard Goetz

Goethe University Frankfurt

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)

Date Written: April 2016

Abstract

We develop a new identification strategy to evaluate the impact of the geographic expansion of a bank holding company (BHC) across U.S. metropolitan statistical areas (MSAs) on BHC risk. For the average BHC, the instrumental variable results suggest that geographic expansion materially reduces risk. Geographic diversification does not affect loan quality. The results are consistent with arguments that geographic expansion lowers risk by reducing exposure to idiosyncratic local risks and inconsistent with arguments that expansion, on net, increases risk by reducing the ability of BHCs to monitor loans and manage risks.

Keywords: Bank Regulation, Banking, financial stability, Hedging, risk

JEL Classification: G11, G21, G28

Suggested Citation

Goetz, Martin Richard and Laeven, Luc A. and Levine, Ross Eric, Does the Geographic Expansion of Banks Reduce Risk? (April 2016). CEPR Discussion Paper No. DP11231, Available at SSRN: https://ssrn.com/abstract=2766559

Martin Richard Goetz (Contact Author)

Goethe University Frankfurt ( email )

Theodor W Adorno Platz 4
Frankfurt, 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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