Geographic Expansion and Profits of Financial Institutions

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Geographic diversification is a necessity for any financial institution interested in growing and expanding. As financial institutions grow geographically, numerous issues may arise. Before any expansion planning can be done, financial institution managers must make a determination on the type of geographic expansion that best fits the financial institution and its goals. Making the correct decision to further expand operations domestically or internationally is imperative to ensure success of the expansion. Regardless of the breadth of the expansion efforts, financial institutions will face increased risks, new regulatory environments, and potentially different cultural barriers. Outside of these risks, however, is the issue of profitability.

A financial institution’s profitability is a significant factor in a decision to expand geographically or not. After all, for businesses including financial institutions, there would be little reason to expand without the expectation of increased profitability. Following is a discussion on geographic diversification and why it is significant for financial institutions to consider as well as the benefits and limitations of said expansion.

Over time, the banking industry in the United States has undergone rapid geographic expansions which are mostly attributed to decreased regulations, improved technologies, and increased competition (Deng & Elyasiani, 2008). Geographic expansion, or diversification, for financial institutions is when they advance their business operations into new “locations within their home regions, into other regions within their home nation, or into other host nations, any of which may be considerable distances away” (Berger & DeYoung, 2001, p. 163). In othe...

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