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Does the geographic expansion of banks reduce risk?

Martin Goetz (), Luc Laeven () and Ross Levine ()

Journal of Financial Economics, 2016, vol. 120, issue 2, 346-362

Abstract: 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.

Keywords: Banking; Bank regulation; Financial stability; Risk; Hedging (search for similar items in EconPapers)
JEL-codes: G21 G28 G11 (search for similar items in EconPapers)
Date: 2016
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