“Diversification of Geographic Risk in Retail Bank Networks: Evidence from Bank Expansion after the Riegle-Neal Act” by Hui Wang
University of Toronto
The 1994 Riegle Neal (RN) Act removed interstate banking restrictions. 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 geographic risk measure and a model of branch network choice, we identify preferences towards GRD separately from other factors that may limit expansion after RN. Counterfactual experiments based on the estimated model show that risk negatively affects bank value, but is counterbalanced by economies of density/scale, reallocation/ merging costs, and local market power concerns.