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Does the Geographic Expansion of Banks Reduce Risk?

Luc Laeven, Ross Levine () and Götz, Martin
Authors registered in the RePEc Author Service: Martin Richard Goetz

No 11231, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a new identification strategy to evaluate the impact of the geographic expansion of a bank holding company (BHC) across U.S. 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.

Keywords: Banking; Bank regulation; Financial stability; Risk; Hedging (search for similar items in EconPapers)
JEL-codes: G11 G21 G28 (search for similar items in EconPapers)
Date: 2016-04
New Economics Papers: this item is included in nep-ban, nep-rmg and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (136)

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