Clustering and Matching of US Banks During the Crisis

The observation related to the period of the financial crisis started in 2007 that raised my attention was the high variation in cross-section of banks' risk across US banks. Based on this observation the following questions look for an answer. First, how did banks group between each other with respect to pre crisis financial statement information, before and after the crisis level of risk, and during the crisis change in risk; which are the variables that differ significantly between various groups of banks? Second, did geographic diversification have a statistically significant effect on the level and change in banks' risk during the financial crisis? Third, did those banks that diversify substantially before the crisis also have a larger increase in risk during the crisis compared to those banks that did not diversify their operations much? To try to find answers to these questions I conduct the analysis on middle size and large, listed and private American banks. I measure banks' risk with Z-score, while the geographic diversification is measured with Herfindahl-Hirschman index based on deposit dispersion. The main conclusion of the analysis is that those banks that were the most profitable and had the highest Z-score in 2006 also experienced the highest increase in risk during the crisis. This result can be explained by the fact that most probably these banks were engaged in profitable business lines before the crisis and at the same time they underestimated the risk of these businesses, such as securitization (they had too low equity for the risk they took before the crisis). In the second part of the analysis I do not find evidence that geographic diversification had a statistically significant effect on the level and change in banks' risk during the last financial crisis. In the last part of the analysis I find that those banks that diversified substantially before the crisis had a larger increase in risk during the crisis compared to those banks that did not diversify their operations much