Resilience of Small Banks compared with Large Banks: Evidence From the 2007-2013 U.S. Financial Crisis

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Author	Pooran Lall
ISSN	2307-2466
On Pages	14-26
Volume No.	4
Issue No.	1
Issue Date	February 01, 2020
Publishing Date	February 01, 2020
Keywords	US banks, small banks, bank size, community bank

Abstract

Understanding how bank profitability factors differentially affect small banks and large banks can help explain why small banks are so resilient compared with large banks. This paper determined the differential effects of bank specific, market related and macroeconomic/locational factors on bank profitability in the United States during the 2007-2013 financial crisis. The results, estimated by using generalized least square, showed that the factors considered explained ninety four percent of the variability in profitability of large banks and only sixty five percent of the variability in profitability in small banks. Interest rate risk, liquidity risk and capitalization risk, lending rate, product specialization, bank location and scale of banking operation had positive effects on small bank profitability. Product specialization, credit risk and bank location and scale of banking operation had a stronger differential impact on the profitability of small bank compared with large bank. Large-bank profitability showed a comparatively stronger positive correlation with the market related factors, loan creation and portfolio diversification, and a stronger negative correlation with credit risk. The scale and geographic location of banking operation has no significant effect on the profitability of large bank.

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