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The Benefits of Intrastate and Interstate Geographic Diversification in Banking

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Listed:
  • Céline Meslier-Crouzille

    () (LAPE - Laboratoire d'Analyse et de Prospective Economique - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)

  • 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 - UNILIM - Université de Limoges - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société)

Abstract

We estimate the benefits of intrastate and interstate geographic diversification for bank risk and return, and assess whether such benefits could be shaped by differences in bank size and disparities in economic conditions within states or across U.S. states. For small banks, only intrastate diversification is beneficial in terms of risk-adjusted returns but for very large institutions both intrastate and intrastate expansions are rewarding. However, in all cases the relationship is hump-shaped for both intrastate and interstate diversification indicating limits for banks of all size. Moreover, while our results indicate that the average 'very large' bank has already reached its optimal diversification level, the average 'small bank' could still benefit in terms of risk-adjusted returns from further geographic diversification. Higher economic disparity as measured by the dispersion in unemployment rates either across counties or states impacts the benefits of diversification. At initially low levels of diversification, moving to other markets with dissimilar economic conditions lowers the added value of diversification but it becomes more beneficial at higher diversification levels.

Suggested Citation

  • Céline Meslier-Crouzille & Donald P. Morgan & Katherine Samolyk & Amine Tarazi, 2014. "The Benefits of Intrastate and Interstate Geographic Diversification in Banking," Working Papers hal-00950504, HAL.
  • Handle: RePEc:hal:wpaper:hal-00950504 Note: View the original document on HAL open archive server: https://hal-unilim.archives-ouvertes.fr/hal-00950504
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    References listed on IDEAS

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    Keywords

    Bank Holding Company; Geographic Diversification; Intrastate and interstate disparities in economic activity; Bank risk and return;

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