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Does the Geographic Expansion of Bank Assets Reduce Risk?

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

No 20758, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a new identification strategy to evaluate the impact of the geographic expansion of bank holding company (BHC) assets across U.S. metropolitan statistical areas (MSAs) on BHC risk. We find that the geographic expansion of bank assets reduces risk. Moreover, geographic expansion reduces risk more when BHCs expand into economically dissimilar MSAs, i.e., MSAs with different industrial structures and business cycles. We do not find that geographic diversification improves loan quality. Our results are consistent with arguments that geographic expansion lowers risk by reducing exposure to idiosyncratic local risks and inconsistent with arguments that geographic expansion, on net, increases risk by reducing the ability of BHCs to monitor loans and manage risks.

JEL-codes: G11 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-rmg and nep-ure
Date: 2014-12
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