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Discussion Paper Details

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Title: Diversification of Geographic Risk in Retail Bank Networks: Evidence from Bank Expansion after the Riegle-Neal Act

Author(s): Victor Aguirregabiria, Robert Clark and Hui Wang

Publication Date: February 2014

Keyword(s): Branch networks, Commercial banking, Geographic risk diversification, Liquidity risk, Oligopoly competition and Riegle Neal Act

Programme Area(s): Financial Economics and Industrial Organization

Abstract: The 1994 Riegle Neal (RN) Act removed interstate banking restrictions in the US. The primary motivation was to permit geographic risk diversification (GRD). Using a factor model to measure banks' geographic risk, we show that RN expanded GRD possibilities in small states, but that few banks took advantage. Using our measure of geographic risk and an empirical model of bank choice of branch network, we identify preferences towards GRD separately from the contribution of other factors that may limit the expansion of some banks after RN. Counterfactual experiments based on the estimated structural model show that risk has a significant negative effect on bank value, but this has been counterbalanced by economies of density/scale, reallocation/merging costs, and concerns for local market power.

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Bibliographic Reference

Aguirregabiria, V, Clark, R and Wang, H. 2014. 'Diversification of Geographic Risk in Retail Bank Networks: Evidence from Bank Expansion after the Riegle-Neal Act'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9816