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The Benefits and Costs of Geographic Diversification in Banking

Author

Listed:
  • Céline Meslier-Crouzille

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

  • Donald P. Morgan

    (Federal Reserve Bank of New-York - Federal Reserve Bank of New York)

  • Katherine Samolyk

    (Consumer Financial Protection Bureau - Consumer Financial Protection Bureau)

  • Amine Tarazi

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

Abstract

We estimate the benefits of geographic diversification within states and across states for bank risk and return for all U.S. bank holding companies over 1994 to 2008, and assess whether such benefits depend on bank size.For small banks, only intrastate diversification increases risk-adjusted returns and reduces default risk while for very large institutions only interstate expansions are beneficial but only in terms of default risk. In all cases the relationship ishump-shaped indicating that at some point, the possible agency costs associated with banks getting wider and more geographically diversified outweigh the benefits.Our results indicate that small banks and very large banks could still benefit from further geographic diversification. Email Addresses: celine.meslier@unilim.fr (Céline Meslier),Don.Morgan@ny.frb.org (Donald P. Morgan) katherine.Samolyk@cfpb.gov (Katherine Samolyk), tarazi@unilim.fr (Amine Tarazi). The views herein do not necessarily reflect those of the Federal Reserve System. 2

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  • Céline Meslier-Crouzille & Donald P. Morgan & Katherine Samolyk & Amine Tarazi, 2016. "The Benefits and Costs of Geographic Diversification in Banking," Post-Print hal-01338717, HAL.
  • Handle: RePEc:hal:journl:hal-01338717
    Note: View the original document on HAL open archive server: https://hal-unilim.archives-ouvertes.fr/hal-01338717
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    References listed on IDEAS

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    Cited by:

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    3. Schüwer, Ulrich & Gropp, Reint E. & Noth, Felix, 2016. "What drives banks' geographic expansion? The role of locally non-diversifiable risk," VfS Annual Conference 2016 (Augsburg): Demographic Change 145885, Verein für Socialpolitik / German Economic Association.
    4. Banto, Jean Michel & Monsia, Atokê Fredia, 2021. "Microfinance institutions, banking, growth and transmission channel: A GMM panel data analysis from developing countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 126-150.
    5. Matthieu Bussière & Baptiste Meunier & Justine Pedrono, 2020. "Heterogeneity in Bank Leverage: the Funding Channels of Complexity," Working papers 771, Banque de France.
    6. Xiaonan Li & Chang Song, 2021. "Does the target market affect bank performance? Evidence from the geographic diversification of city commercial banks in China," Frontiers of Business Research in China, Springer, vol. 15(1), pages 1-25, December.
    7. Francesco Marchionne & Alberto Zazzaro, 2018. "Risk and competitiveness in the Italian banking sector," Economics Bulletin, AccessEcon, vol. 38(1), pages 271-280.
    8. Grodecka-Messi, Anna & Kenny, Seán & Ögren, Anders, 2021. "Predictors of bank distress: The 1907 crisis in Sweden," Explorations in Economic History, Elsevier, vol. 80(C).
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    More about this item

    Keywords

    return; agency costs; bank geographic diversification; risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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