Bank Geographic Diversification and Systemic Risk, a paper co-authored by our school’s Assistant Prof. Xia Cong, Prof. Saiying Deng from Kent State University and Prof. Yongqiang Chu from University of North Carolina at Charlotte, was accepted by Review of Financial Studies (RFS), a top-class international financial journal. Being one of the world’s three most prestigious finance journals, RFS receives more than 1,000 papers from all over the world, but normally not more than 60 of which are finally published (at an acceptance rate of around 5.4%).

This paper finds that although bank geographic diversification can lower individual risks of banks, banks still face similar risks when most of them are diversified geographically, which leads to higher systemic risks. It further finds that this is due to an increase in similarity of asset structures held by banks. The impact of geographic diversification on systemic risk is stronger in BHCs located in states co-moving less with the U.S. aggregate economy.

By using conditional value at risk (ΔCoVaR) and financial integration (Logistic(R2)) as the indicators for systemic risk, the paper builds an instrumental variable for geographic diversification under the gravity-deregulation model, which contains information about bank deregulation and geographic distribution of individual banks at the same time. This addresses the endogenous issues arising from bank geographic diversification, as banks can choose whether to diversify geographically. In channel analysis, the authors construct similarity between asset and loan structures of banks by means of cosine similarity, and find that bank geographic diversification leads to higher asset and loan structure similarity, and banks will encounter similar risks, making them more susceptible to the shocks of systemic risk.