The Benefits 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 intrastate and interstate geographic diversification for bank risk and return, and assess whether such benefits could be shaped by differences in bank size and disparities in economic conditions within states or across U.S. states. For small banks, only intrastate diversification is beneficial in terms of risk-adjusted returns but for very large institutions both intrastate and interstate expansions are rewarding. However, in all cases the relationship is hump-shaped for both intrastate and interstate diversification indicating limits for banks of all size. Moreover, we also find geographic expansion to reduce bank risk. Our results indicate that both small banks and very large banks could still benefit in terms of risk-adjusted returns from further geographic diversification. Disparities in economic conditions as measured by the dispersion in unemployment rates either across counties or states impact the benefits of diversification. At initially low levels of intrastate diversification, expanding in new markets allows small banks to further reduce their risk in the presence of higher economic disparities. However, when they get more diversified, this effect is reduced.

Keywords: Bank Holding Company; Geographic Diversification; Intrastate and interstate disparities in economic activity; Bank risk and return (search for similar items in EconPapers)
Date: 2015-05-26
New Economics Papers: this item is included in nep-ban, nep-geo, nep-ger and nep-rmg
Note: View the original document on HAL open archive server: https://unilim.hal.science/hal-01155170
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Citations: View citations in EconPapers (3)

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