Importance of Scale Economies and Geographic Diversification in Community Bank Mergers

The paper simulates the mergers of community banks both within and across economic market areas by combining their call report data. The authors find that idiosyncratic risk reduction dominates local market risk reduction. In other words, a typical community bank can diversify away its idiosyncratic risk almost as completely by merging with a bank across the street as it can by merging with one located across the country.