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Bank Geographic Diversification and Systemic Risk

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  • Yongqiang Chu
  • Saiying Deng
  • Cong Xia
  • Philip Strahan

Abstract

Exploiting staggered interstate banking deregulation as exogenous shocks to bank geographic expansion, we examine the causal effect of geographic diversification on systemic risk. Using the gravity-deregulation approach, we find that bank geographic diversification leads to higher systemic risk measured by the change in conditional value at risk ($\Delta$CoVaR) and financial integration (Logistic($R^{2}))$. Furthermore, we document that geographic diversification affects systemic risk via its impact on asset similarity. The impact of geographic diversification on systemic risk is stronger in BHCs located in states comoving less with the U.S. aggregate economy.

Suggested Citation

  • Yongqiang Chu & Saiying Deng & Cong Xia & Philip Strahan, 2020. "Bank Geographic Diversification and Systemic Risk," The Review of Financial Studies, Society for Financial Studies, vol. 33(10), pages 4811-4838.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:10:p:4811-4838.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz148
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    Cited by:

    1. Armstrong, Christopher & Nicoletti, Allison & Zhou, Frank S., 2022. "Executive stock options and systemic risk," Journal of Financial Economics, Elsevier, vol. 146(1), pages 256-276.
    2. Anthony J. Glass & Karligash Kenjegalieva, 2023. "Dynamic returns to scale and geography in U.S. banking," Papers in Regional Science, Wiley Blackwell, vol. 102(1), pages 53-85, February.
    3. Irawan, Denny & Okimoto, Tatsuyoshi, 2022. "Conditional capital surplus and shortfall across renewable and non-renewable resource firms," Energy Economics, Elsevier, vol. 112(C).
    4. Wang, Wei & Xu, Huifu & Ma, Tiejun, 2023. "Optimal scenario-dependent multivariate shortfall risk measure and its application in risk capital allocation," European Journal of Operational Research, Elsevier, vol. 306(1), pages 322-347.
    5. Huirui Zhang & Sanbao Zhang, 2022. "How Does the Sustainable Investment Climate Affect Firm Geographic Diversification in China? Managerial Discretion as a Mediator," Sustainability, MDPI, vol. 14(5), pages 1-16, February.
    6. Li, Zongyuan & Lai, Rose Neng, 2024. "Are “too big to fail” banks just different in size? – A study on systemic risk and stand-alone risk," International Review of Financial Analysis, Elsevier, vol. 93(C).
    7. Maghyereh, Aktham Issa & Yamani, Ehab, 2022. "Does bank income diversification affect systemic risk: New evidence from dual banking systems," Finance Research Letters, Elsevier, vol. 47(PB).
    8. Jin, Yi & Liu, Sinuo & Sun, Yongping & Fang, Jie, 2024. "Energy transition and housing market bubbles: Evidence from prefecture cities in China," Energy Economics, Elsevier, vol. 133(C).
    9. Firoozi, Fathali & Lien, Donald, 2022. "Models of optimal contract in lending: Evaluating the impact of diversified versus focused policies on riskiness of borrower base," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    10. Ren, Meixu & Zhao, Jingmei & Ke, Konglin & Li, Yidong, 2023. "Bank homogeneity and risk-taking: Evidence from China," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 142-154.
    11. Denny IRAWAN & OKIMOTO Tatsuyoshi, 2021. "Conditional Capital Surplus and Shortfall across Resource Firms," Discussion papers 21031, Research Institute of Economy, Trade and Industry (RIETI).
    12. Borri, Nicola & Giorgio, Giorgio di, 2022. "Systemic risk and the COVID challenge in the european banking sector," Journal of Banking & Finance, Elsevier, vol. 140(C).
    13. G Andrew Karolyi & John Sedunov & Alvaro G. Taboada, 2023. "Cross-Border Bank Flows and Systemic Risk," Review of Finance, European Finance Association, vol. 27(5), pages 1563-1614.
    14. Yan, Guan & Liu, Zhidong, 2023. "Interconnectedness of financial institutions based on pledged shares in China," Finance Research Letters, Elsevier, vol. 57(C).
    15. Kalluru Siva Reddy, 2021. "Are Banks in India Diversified Enough, Geographically, Across States and Economic Sectors?," Review of Development and Change, , vol. 26(1), pages 83-103, June.
    16. Adasi Manu, Sylvester & Qi, Yaxuan, 2023. "CEO social connections and bank systemic risk: The “dark side” of social networks," Journal of Banking & Finance, Elsevier, vol. 156(C).
    17. Deni Irawan & Tatsuyoshi Okimoto, 2021. "Conditional Capital Surplus and Shortfall across Renewable and Non-Renewable Resource Firms," LPEM FEBUI Working Papers 202165, LPEM, Faculty of Economics and Business, University of Indonesia, revised 2021.
    18. Lai, Shaojie & Chen, Lihan & Wang, Qing Sophie & Anderson, Hamish D., 2023. "Bank competition and corporate employment: Evidence from the geographic distribution of bank branches in China," Journal of Banking & Finance, Elsevier, vol. 154(C).
    19. Lee, Chien-Chiang & Wang, Yurong & Zhang, Xiaoming, 2023. "Corporate governance and systemic risk: Evidence from Chinese-listed banks," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 180-202.
    20. Shutong Zhang & Jun Nagayasu, 2023. "Regional Policies’ Impacts on Urban Migration:Evidence from Special Economic Zones in China," TUPD Discussion Papers 45, Graduate School of Economics and Management, Tohoku University.
    21. Cucinelli, Doriana & Soana, Maria Gaia, 2023. "Systemic risk in non financial companies: Does governance matter?," International Review of Financial Analysis, Elsevier, vol. 87(C).
    22. Aldasoro, Iñaki & Hardy, Bryan & Jager, Maximilian, 2022. "The Janus face of bank geographic complexity," Journal of Banking & Finance, Elsevier, vol. 134(C).
    23. Maghyereh, Aktham & Abdoh, Hussein & Al-Shboul, Mohammad, 2022. "Oil structural shocks, bank-level characteristics, and systemic risk: Evidence from dual banking systems," Economic Systems, Elsevier, vol. 46(4).
    24. Cheol Eun & Lingling Wang & Tim Zhang, 2022. "House Price Growth Synchronization and Business Cycle Alignment," The Journal of Real Estate Finance and Economics, Springer, vol. 65(4), pages 675-710, November.

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