What Drives the Persistent Competitiveness of Small Banks?

Several trends in the financial industry could have weakened the competitiveness of small banks in the past. Despite those challenges, small banks have grown more rapidly than larger banks over the period from 1985 to 2001, and their profitability has been sustained at high levels. However, small banks have needed to increase the interest rates offered on deposit accounts in order to attract progressively more deposit funding. This paper provides empirical evidence that this increased interest cost primarily reflects the high rate of return that small banks were able to earn on their assets.

Provided by: Federal Reserve Board Topic: Software Date Added: May 2002 Format: PDF

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