Does the Geographic Expansion of Bank Assets Reduce Risk?

Journal of Financial Economics, Vol. 120, Issue 2, pp. 346-362

Martin Götz,
Luc Laeven,
Ross Levine
Research Area:
Financial Intermediation
May 2016
Banking, Bank Regulation, Financial Stability, Risk, Hedging, Business Cycles, Industrial Structuree

We develop a new identification strategy to evaluate the impact of the geographic expansion of a bank holding company (BHC) across US metropolitan statistical areas (MSAs) on BHC risk. For the average BHC, the instrumental variable results suggest that geographic expansion materially reduces risk. Geographic diversification does not affect 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.

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