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Does Scale Matter in Community Bank Performance? Evidence Obtained by Applying Several New Measures of Performance

Joseph Hughes (), Julapa Jagtiani (), Loretta J. Mester () and Choon-Geol Moon ()
Additional contact information
Julapa Jagtiani: Federal Reserve Bank of Philadelphia
Loretta J. Mester: Federal Reserve Bank of Cleveland
Choon-Geol Moon: Hanyang University

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: We consider how size matters for banks in three size groups: small community banks with assets less than $1 billion, large community banks with assets between $1 billion and $10 billion, and midsize banks with assets between $10 billion and $50 billion. To illustrate the differences between these banks and larger banks whose business models are distinctly different, we examine large banks with assets between $50 billion and $250 billion and the largest banks with assets exceeding $250 billion. Community banks have potential advantages in relationship lending compared with large banks. However, increases in regulatory compliance and technological burdens may have disproportionately increased community banks’ costs, raising concerns about small businesses’ access to credit. Our evidence suggests several patterns: (1) while small community banks exhibit relatively more valuable investment opportunities, larger community banks, midsize banks, and larger banks exploit theirs more efficiently and achieve better financial performance; (2) average operating costs that include costs related to regulatory compliance and technology decrease with size; (3) unlike small community banks, large community banks have financial incentives to increase lending to small businesses; and (4) for business lending and commercial real estate lending, compared with small community banks, large community banks, midsize banks, and larger banks assume higher inherent credit risk and exhibit more efficient lending. Thus, concern that small business lending would be adversely affected if small community banks find it beneficial to increase their scale is not supported by our results.

Keywords: community banking; scale; financial performance; small business lending (search for similar items in EconPapers)
JEL-codes: G21 L25 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-eff and nep-ure
Date: 2019-05-14
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http://www.sas.rutgers.edu/virtual/snde/wp/2019-01.pdf (application/pdf)

Related works:
Journal Article: Does scale matter in community bank performance? Evidence obtained by applying several new measures of performance (2019) Downloads
Working Paper: Does Scale Matter in Community Bank Performance? Evidence Obtained by Applying Several New Measures of Performance (2018) Downloads
Working Paper: DOES SCALE MATTER IN COMMUNITY BANK PERFORMANCE? EVIDENCE OBTAINED BY APPLYING SEVERAL NEW MEASURES OF PERFORMANCE (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:201901

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