Faculty of Economics and Business Administration Publications Database

Does the Geographic Expansion of Banks Reduce Risk?

Laeven, Luc
Levine, Ross
ISSN-Print: 0304-405X
Link External Source: Online Version
Year: 2016
Keywords: Banking; Bank Regulation; Financial Stability; Risk; Hedging

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. We find that geographic expansion reduces risk. Specifically, geographic expansion only reduces risk when BHCs expand into economically dissimilar MSAs, i.e., MSAs with asynchronous business cycles. Geographic diversification does not improve 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.