Academic journal article Academy of Accounting and Financial Studies Journal

Bank Size Effect in the Deposit Market: Evidence from Bank Branch Ownership Changes

Academic journal article Academy of Accounting and Financial Studies Journal

Bank Size Effect in the Deposit Market: Evidence from Bank Branch Ownership Changes

Article excerpt

INTRODUCTION

The most recent financial crisis has put large banks under the spotlight for the systematic risks they bring to the economy. The massive bailout of these banks has been troubling for regulators. During a senate hearing on establishing a framework for systemic risk regulation in 2009, Sheila Bair, then Chairman of the U.S. Federal Deposit Insurance Corporation (FDIC), states that "the notion of too big to fail creates a vicious circle that needs to be broken." She further states in her testimony the need to "develop a resolution regime that provides for the orderly wind-down of large, systemically important financial firms, without imposing large costs to the taxpayer." While debatable, many even have advocated the breaking-up of large banks to avoid the "too-big-to-fail" problem and future financial catastrophe. The Progressive Change Institute, who recently released a poll result showing bipartisan backing for breaking up big banks, is an example of such advocate groups (Schroeder, 2015). The Economist magazine held a debate on whether big banks should be broken up on May 14, 2013, and the post-debate poll indicated favorable public sentiment with 83% yes vote.

However, technology advances and heightened regulation have favored large banks as never before. For example, Wheelock and Wilson (2010) suggest that information technology has tended to favor larger institutions for two reasons. First, larger institutions can more easily bear the relatively high fixed cost of information processing equipment and software. Secondly, the new technologies have eroded the value of close proximity and personal relationships in gaining soft information, which has been an advantage of small institutions. Regarding regulation, Peirce et al (2014) conduct a small bank survey covering 200 banks across 41 states, and report substantially increased compliance costs in the wake of new regulations such as Dodd-Frank for participating banks. Indeed, according to FDIC data, U.S. banking assets and deposits have continued to consolidate since the financial crisis of 2008. Tracy (2013) reports in a Wall Street Journal article that the number of federally insured institutions has shrank to 6,891 in the third quarter of 2013, and community banks might be "too small to survive".

While technology and regulation both put small banks at a disadvantage, community banks have many advantages compared with large banks in the deposit market. The ability to source low-cost stable core deposits can significantly lower bank funding cost, contributing to the bank's financial well-being. Small banks are known for their more personalized sendees, lower checking fees, and more lending flexibility (Kadlec, 2014). According to the 2013 Banking satisfaction study by J. D. Powers, smaller banks have higher scores regarding fees and problem resolution. At the same time, the ability of banks to attract transaction and savings deposits from businesses and consumers is an important measure of a bank's acceptance by the public (Rose and Hudgins, 2012, P. 397). Community banks are viewed as part of the local economy, and indeed, they tend to keep their sourced deposits in the local community. In the wake of the recent global financial crisis, the resentment towards the largest banks of the country has grown, and as mentioned earlier, the idea of breaking up large banks has gained support and advocated by many advocate groups. Therefore, the depositor sentiment may also play in the smaller banks' favor. Of course, large banks do offer more convenience thanks to their larger branch and ATM network. The scale of economy allows them to provide more cutting-edge technology and security features appreciated by customers (Kadlec, 2014). On balance, it is an empirical question whether larger or smaller banks have an upper hand in the competition for deposits.

This paper attempts to shed light on this question. Specifically, we examine the effect of bank size on deposit market competition, by utilizing a natural laboratory setting where branch offices experience ownership change among banks of different sizes. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.