Events at CERGE-EI

Sebastian Doerr, Ph.D.

Bank for International Settlements

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Abstract: The recent banking turmoil has renewed attention on banks’ branch network and deposit taking activity. This paper provides novel evidence that the geographic diversification of banks’ deposit base improves their funding stability and thereby fosters liquidity creation. First, I establish that banks with greater diversification have higher dispersion in deposit growth rates across their branches; and lower volatility in deposit growth rates over time. Subsequently, banks benefit from lower deposit rates. These patterns are consistent with diversification improving funding stability. Second, I show that deposit diversification enables banks to engage in increased liquidity creation and small business lending, with positive effects for real economic activity. The funding stability channel of geographic diversification is distinct from previous findings on the benefits of diversification on banks’ asset side. It also highlights benefits of branch networks for bank lending that go beyond information acquisition.

JEL Classification: G20, G21, G28
Keywords: Bank diversification, deposits, funding stability, liquidity creation, risk

Full Text: Bank geographic diversification and funding stability