Journal of Financial Economics Vol. 120 No. 2 2016

Does the geographic expansion of banks reduce risk?

Martin R. Goetz¹; Luc Laeven^2,3,4; Ross Levine^5,6,7

¹ Goethe University Frankfurt · ² European Central Bank · ³ Tilburg University · ⁴ Centre for Economic Policy Research · ⁵ University of California, Berkeley · ⁶ National Bureau of Economic Research · ⁷ Milken Institute

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.

DOI

10.1016/j.jfineco.2016.01.020

Volume

120

Issue

2

Pages

346-362

Language

en

Sources

crossref bibtex:phds-export.bib openalex

Cite

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