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posted on 19 July 2016

Has The Relationship Between Bank Size And Profitability Changed?

from the Kansas Fed

-- this post authored by Kristen Regehr and Rajdeep Sengupta

In recent years, community bankers and industry analysts have raised concerns that smaller community banks need to grow larger to be successful. Today, banks face new and higher costs to both implement complex new regulations, especially those introduced after the 2007-09 financial crisis and recession, and transition to new electronic banking platforms.

For small banks, these higher fixed costs are spread over a smaller asset base, which may put them at a competitive disadvantage relative to larger competitors. In addition, if the competitive disadvantage threatens the profitability and long-run viability of smaller banks, smaller communities and rural areas not large enough to support viable banks may lose access to their local banking services. Even if these communities do not lose banking services, a reduction in the number of banks can reduce competition, which may then lead to higher loan rates and lower deposit rates

However, size is not the only factor that affects a bank's long-run profitability. In fact, profitability depends on the characteristics of both individual banks and the markets in which they operate. For example, bank-specific factors such as business strategies, reflected in the composition of banks' assets and liabilities, can affect profitability. Likewise, market-specific factors, such as growth in the markets in which banks operate, can affect banks' long-run profitability. Any analysis that thoroughly examines the relationship between bank profitability and bank size must account for such bank-specific and market-specific factors.

[click on image below to continue reading]

Source: ~/media/ files/publicat/ econrev/ econrevarchive/ 2016/ 2q16regehrsengupta.pdf

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