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Diversification of geographic risk in retail bank networks: evidence from bank expansion after the Riegle‐Neal Act
Author(s) -
Aguirregabiria Victor,
Clark Robert,
Wang Hui
Publication year - 2016
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12136
Subject(s) - diversification (marketing strategy) , limiting , counterfactual conditional , business , value at risk , economics , risk management , finance , marketing , mechanical engineering , counterfactual thinking , philosophy , epistemology , engineering
The 1994 Riegle‐Neal Act (RN) removed restrictions on branch‐network expansion for banks in the United States. An important motivation was to facilitate geographic risk diversification (GRD). Using a factor model to measure banks' geographic risk, we show that RN expanded GRD possibilities in small states, but only some large banks took advantage. Using our measure of geographic risk and an empirical model of branch‐network choice, we identify preferences toward GRD separately from other factors possibly limiting network expansion. Counterfactuals show that risk negatively affected bank value but was counterbalanced by economies of density/scale, reallocation/merging costs, and local market power concerns.