Geographic Diversification, Competition and Bank Survival

This article analyzes the effects from portfolio diversification and banking competition on the stability of U.S. banks during the 2008-2011 banking crisis. To do so, it uses exogenous cross-sectional and time-series variation in states' branching restrictions between 1997-2005, the degree of local business cycle integration, and topographic variation (such as oceans and international borders) that limit the potential to diversify nearby bank headquarters. I find that for each standard deviation increase in pre-crisis banking competition and each standard deviation increase in portfolio diversification the failure probability is reduced by 1.6% and 5.8% respectively. These are large effects relative to the 2008-2011 unconditional bank failure probability and calls for renewed regulatory attention toward the degree of geographic diversification and banking competition.