Most community banks face relatively high levels of diversifiable credit risk because they have relatively few loan customers (idiosyncratic risk) and are not geographically diversified (local market risk). We simulate mergers among community banks to quantify the relative contributions of...

Mergers of community banks across economic market areas potentially reduce both idiosyncratic and local market risk. A merger may reduce idiosyncratic risk because the larger post-merger bank has a larger customer base. Negative credit and liquidity shocks from individual customers would have...

Mergers of community banks across economic market areas potentially reduce both idiosyncratic and local market risk. Idiosyncratic risk may be reduced because the larger post merger bank has a larger customer base. Negative credit and liquidity shocks from individual customers would have smaller...

Risky behavior by banks is kept in check primarily with two tools: examinations and the rule that requires owners to keep a certain amount of their own money invested in their banks. Some people now want to tap the markets for further assistance with bank supervision.