Working Paper: NBER ID: w22544
Authors: Ross Levine; Chen Lin; Wensi Xie
Abstract: We assess the impact of the geographic expansion of bank assets on the cost of banks’ interest-bearing liabilities. Existing research suggests that expansion can both intensify agency problems that increase funding costs and facilitate risk diversification that decreases funding costs. Using a newly developed identification strategy, we discover that the geographic expansion of banks across U.S. states lowered their funding costs, especially when banks are headquartered in states with lower macroeconomic covariance with the overall U.S. economy. The results are consistent with the view that geographic expansion offers large risk diversification opportunities that reduce funding costs.
Keywords: Geographic Diversification; Funding Costs; Banking; Risk Management
JEL Codes: G21; G28; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| geographic diversification (R12) | funding costs (G32) |
| geographic diversification (R12) | funding costs (G32) |
| BHCs with higher funding costs (G32) | geographic diversification (R12) |