ABSTRACT This paper examines how local housing price fluctuations affect the performance of geographically diversified versus local banks. We find that local banks exhibit lower sensitivity to housing price fluctuations than diversified banks. Diversified banks tend to pursue more aggressive capital strategies that encourage risk‐taking, whereas local banks demonstrate stronger capabilities in managing loan quality, serving niche markets, enhancing customer relationships, and achieving favorable loan pricing. Overall, our results suggest that the elevated risk‐taking of diversified banks can offset the potential benefits of geographic diversification. In contrast, local banks—aware of their limited diversification opportunities—adopt conservative funding structures and focus on high‐margin market segments. This strategic positioning strengthens their resilience and supports long‐term sustainability, even amid continued industry consolidation.
James et al. (Sun,) studied this question.