Andrew Swanson

There has been a great deal of consolidation in the U.S. commercial banking industry since the banking crisis of the 1980s and early 1990s, leading to greater geographic diversification in the industry. Throughout this consolidation process studies have attempted to measure the effects of greater geographic diversification on insolvency risk. Data on commercial bank failures from the recent financial crisis allow for different techniques in estimating these effects, as well as the ability to compare estimates across the two banking crises. Using a logit model, this paper finds that, ceteris paribus, more geographically diversified banks exhibited a lower probability of insolvency during both banking crises, with the magnitude of these effects being smaller in the recent banking crisis. Furthermore, allowing for portfolio choices to vary, and holding commercial bank size constant, banks with greater geographic diversification during the crisis of the 1980s and 1990s  were overall less likely to become insolvent, while there is no systematic difference in the overall probability of insolvency during the recent crisis.