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

55 Pages Posted: 2 Jun 2014

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: February 2014

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.

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

JEL Classification: G21, L13, L51

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 (February 2014). CEPR Discussion Paper No. DP9816, Available at SSRN: https://ssrn.com/abstract=2444816

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 )

Peking University
Beijing, Beijing 100871
China

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