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Motivated by the recent discussion of the declining importance of deposits as banks' major source of funding the authors investigate which factors determine funding costs at local banks. Using a panel data set of more than 800 German local savings and cooperative banks for the period from 1998 to 2004 they show that funding costs are not only driven by the relative share of comparatively cheap deposits of bank's liabilities but among other factors especially by the size of the bank. In this empirical analysis they find strong and robust evidence that, ceteris paribus, smaller banks exhibit lower funding costs than larger banks suggesting that small banks are able to attract deposits more cheaply than their larger counterparts.
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