DP9816 Diversification of Geographic Risk in Retail Bank Networks: Evidence from Bank Expansion after the Riegle-Neal Act
|Author(s):||Victor Aguirregabiria, Robert Clark, Hui Wang|
|Publication Date:||February 2014|
|Keyword(s):||Branch networks, Commercial banking, Geographic risk diversification, Liquidity risk, Oligopoly competition, Riegle Neal Act|
|JEL(s):||G21, L13, L51|
|Programme Areas:||Financial Economics, Industrial Organization|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9816|
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.