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

44 Pages Posted: 30 Oct 2012 Last revised: 30 Oct 2016

See all articles by Victor Aguirregabiria

Victor Aguirregabiria

University of Toronto - Department of Economics

C. Robert Clark

HEC Montreal

Hui Wang

Peking University - Guanghua School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2016

Abstract

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.

Keywords: Riegle Neal Act, Commercial banking, Oligopoly competition, Branch networks, Liquidity risk, Geographic risk diversification

JEL Classification: L13, L51, G21

Suggested Citation

Aguirregabiria, Victor and Clark, C. Robert and Wang, Hui, Diversification of Geographic Risk in Retail Bank Networks: Evidence from Bank Expansion after the Riegle-Neal Act (September 1, 2016). RAND Journal of Economics, Vol. 47, No. 3, 2016, Available at SSRN: https://ssrn.com/abstract=2168496 or http://dx.doi.org/10.2139/ssrn.2168496

Victor Aguirregabiria (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
4169784358 (Phone)

HOME PAGE: http://individual.utoronto.ca/vaguirre/

C. Robert Clark

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Hui Wang

Peking University - Guanghua School of Management ( email )

Beijing, Beijing 100871
China

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