US Bank Geographical Expansion and Impact on Funding Costs

By incorporating staggered intrastate banking deregulation into a gravity model, this paper investigates the causal impact of intrastate geographical expansion on a bank's costs of interest-bearing liabilities. The focus of the analysis is on bank holding companies (BHCs) that expand solely within their home state. Our study finds that intrastate geographical expansion results in lower costs of funds and deposits. Furthermore, we identify three channels - market power, risk reduction, and agency friction - through which these cost savings are achieved. Our research shows that market power is a significant factor contributing to the cost reduction, as intrastate geographical expansion strengthens market power. Additionally, we find that the expansion of high-risk BHCs within states has a smaller impact on lowering costs compared to other BHCs. In addition, our findings indicate that the cost savings are diminished when BHCs expand into counties that have highly correlated environmental conditions and experience more natural disasters. Finally, we observe that the expansion of smaller BHCs with mild agency frictions has a larger impact on reducing deposit costs, but not fund costs, compared to other BHCs.