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Does the Geographic Expansion of Bank Assets Reduce Risk?

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  • Martin Goetz
  • Luc Laeven
  • Ross Levine

Abstract

We develop a new identification strategy to evaluate the impact of the geographic expansion of bank holding company (BHC) assets across U.S. metropolitan statistical areas (MSAs) on BHC risk. We find that the geographic expansion of bank assets reduces risk. Moreover, geographic expansion reduces risk more when BHCs expand into economically dissimilar MSAs, i.e., MSAs with different industrial structures and business cycles. We do not find that geographic diversification improves loan quality. Our results are consistent with arguments that geographic expansion lowers risk by reducing exposure to idiosyncratic local risks and inconsistent with arguments that geographic expansion, on net, increases risk by reducing the ability of BHCs to monitor loans and manage risks.

Suggested Citation

  • Martin Goetz & Luc Laeven & Ross Levine, 2014. "Does the Geographic Expansion of Bank Assets Reduce Risk?," NBER Working Papers 20758, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20758
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    Cited by:

    1. Liangliang Jiang & Ross Levine & Chen Lin, 2016. "Competition and Bank Opacity," Review of Financial Studies, Society for Financial Studies, vol. 29(7), pages 1911-1942.
    2. Andreas Haufler & Ian Wooton, 2016. "Cross-Border Banking in Regulated Markets: Is Financial Integration Desirable?," CESifo Working Paper Series 6150, CESifo Group Munich.
    3. Jiang, Liangliang & Levine, Ross & Lin, Chen, 2019. "Competition and Bank Liquidity Creation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(2), pages 513-538, April.
    4. Schüwer, Ulrich & Gropp, Reint E. & Noth, Felix, 2016. "What drives banks' geographic expansion? The role of locally non-diversifiable risk," Annual Conference 2016 (Augsburg): Demographic Change 145885, Verein für Socialpolitik / German Economic Association.
    5. Michael A. Flor & Torben Klarl, 2015. "On the Cyclicity of Regional House Prices: New Evidence for U.S. Metropolitan Statistical Areas," CESifo Working Paper Series 5471, CESifo Group Munich.
    6. repec:eee:riibaf:v:46:y:2018:i:c:p:105-119 is not listed on IDEAS
    7. Flor, Michael A. & Klarl, Torben, 2017. "On the cyclicity of regional house prices: New evidence for U.S. metropolitan statistical areas," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 134-156.
    8. Ross Levine & Chen Lin & Wensi Xie, 2016. "Geographic Diversification and Banks’ Funding Costs," NBER Working Papers 22544, National Bureau of Economic Research, Inc.
    9. Ali K. Ozdagli & Jianlin Wang & Anna Chernobai, 2016. "Business complexity and risk management: evidence from operational risk events in U. S. bank holding companies," Working Papers 16-16, Federal Reserve Bank of Boston, revised 01 Oct 2016.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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