Bank Geographic Diversification and Funding Stability

This paper provides novel evidence that the geographic diversification of banks' deposit base improves their funding stability and fosters liquidity creation.

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Sebastian Doerr (Bank for International Settlements)

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IWH, conference room and via Zoom

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Sebastian Doerr is an economist at the Bank for International Settlements and a CEPR Research Affiliate. His research centers on financial intermediation, with a focus on the implications of financial innovation and the rise of non-bank financial institutions for financial stability and the real economy.

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This paper provides novel evidence that the geographic diversification of banks' deposit base improves their funding stability and fosters liquidity creation. First, I establish that diversification increases the dispersion in deposit growth rates across branches of the same bank. It thereby reduces banks' volatility in deposit growth rates over time. Subsequently, bank deposit rates decline. These patterns are consistent with diversification improving funding stability and lowering bank risk. Second, I show that, by enhancing funding stability and lowering costs, diversification allows banks to engage in greater liquidity creation and increased on-balance sheet lending. This funding stability channel of geographic diversification is distinct from previous findings on the benefits of diversification on banks' asset side.