Efficient banking under interstate branching

Nationally chartered banks will be allowed to branch across state lines beginning June 1, 1997. Whether they will depends on their assessment of the profitability of such a delivery system for their services and on their preferences regarding risk and return. The authors investigate the probable effect of interstate branching on banks' risk-return tradeoff, accounting for the endogeneity of deposit volatility. If interstate branching improves the risk-return tradeoff banks face, banks that branch across state lines may choose a higher level of risk in return for higher profits. The authors find distinct efficiency gains due to geographic diversity.