Bank Geographic Diversification and Systemic Risk

Abstract

Exploiting staggered interstate banking deregulation as exogenous shocks to bank geographic expansion, we examine the causal effect of geographic diversification on systemic risk. Using the gravity-deregulation approach developed in Goetz, Laeven, and Levine (2013, 2016), we find that bank geographic diversification leads to higher systemic risk measured by the change in conditional value at risk (ΔCoVaR) and financial integration (Logistic(R2)). Furthermore, we document that geographic diversification affects systemic risk via its impact on asset similarity. The impact of geographic diversification on systemic risk is stronger in BHCs located in states comoving less with the U.S. aggregate economy.

Keywords: Geographic diversification; Systemic risk; Deregulation; Gravity-deregulation

JEL Classification: G01, G20, G21, G28