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Does the Geographic Expansion of Banks Reduce Risk?

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

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: Bank Regulation; Banking; financial stability; Hedging; risk (search for similar items in EconPapers)
JEL-codes: G11 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-rmg and nep-ure
Date: 2016-04
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