The Benefits and Costs of Geographic Diversification in Banking

Céline Meslier-Crouzille (), Donald P. Morgan, Katherine Samolyk and Amine Tarazi
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Céline Meslier-Crouzille: LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges
Donald P. Morgan: Federal Reserve Bank of New-York - Federal Reserve Bank of New York
Katherine Samolyk: Consumer Financial Protection Bureau - Consumer Financial Protection Bureau
Authors registered in the RePEc Author Service: Celine Meslier Crouzille ()

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Abstract: We estimate the benefits of geographic diversification within states and across states for bank risk and return for all U.S. bank holding companies over 1994 to 2008, and assess whether such benefits depend on bank size.For small banks, only intrastate diversification increases risk-adjusted returns and reduces default risk while for very large institutions only interstate expansions are beneficial but only in terms of default risk. In all cases the relationship ishump-shaped indicating that at some point, the possible agency costs associated with banks getting wider and more geographically diversified outweigh the benefits.Our results indicate that small banks and very large banks could still benefit from further geographic diversification. Email Addresses: celine.meslier@unilim.fr (Céline Meslier),Don.Morgan@ny.frb.org (Donald P. Morgan) katherine.Samolyk@cfpb.gov (Katherine Samolyk), tarazi@unilim.fr (Amine Tarazi). The views herein do not necessarily reflect those of the Federal Reserve System. 2

Keywords: bank geographic diversification; risk; return; agency costs (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-ban and nep-eff
Note: View the original document on HAL open archive server: https://unilim.hal.science/hal-01338717
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Citations: View citations in EconPapers (19)

Published in Journal of International Money and Finance, 2016, 69, pp.287-317

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