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Geographic Diversification and Banks’ Funding Costs

Author

Listed:
  • Ross Levine

    (Haas School of Business, University of California, Berkeley, Berkeley, California 94720; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Chen Lin

    (Faculty of Business and Economics, University of Hong Kong, Pokfulam, Hong Kong)

  • Wensi Xie

    (Department of Finance, CUHK Business School, Chinese University of Hong Kong, Shatin, Hong Kong)

Abstract
We assess the impact of geographic diversification on a bank’s costs of interest-bearing liabilities. We employ a new identification strategy and discover that geographic expansion across U.S. states lowered funding costs. Consistent with expansion facilitating risk diversification, we find that (1) funding costs fall more when banks expand into states whose economies are less correlated with the banks’ state and (2) geographic diversification reduces the costs of uninsured, but not insured, deposits. Consistent with expansion intensifying agency frictions, which puts upward pressures on funding costs, we discover that geographic diversification reduces the costs of interest-bearing liabilities more in better-monitored and better-run banks.

Suggested Citation

  • Ross Levine & Chen Lin & Wensi Xie, 2021. "Geographic Diversification and Banks’ Funding Costs," Management Science, INFORMS, vol. 67(5), pages 2657-2678, May.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:5:p:2657-2678
    DOI: 10.1287/mnsc.2020.3582
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    More about this item

    Keywords

    banking; banking regulation; funding cost; financial stability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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