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

RePEc Short ID: pme136
ORCID iD: 0000-0003-0393-7918

Hughes, Joseph P.; Jagtiani, Julapa; Mester, Loretta J.; Moon, Choon-Geol

doi:10.21799/frbp.wp.2018.11

Working Paper

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

Abstract: SUPERSEDES WP16-15 We consider how size matters for banks in three size groups: banks with assets of less than $1 billion (small community banks), banks with assets between $1 billion and $10 billion (large community banks), and banks with assets between $10 billion and $50 billion (midsize banks). 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 that (1) the average costs related to regulatory compliance and technology decrease with size; (2) while small community banks exhibit relatively more valuable investment opportunities, larger community banks and midsize banks exploit theirs more efficiently and achieve better financial performance; (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, large community banks and midsize 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;

JEL Classification: G21; L25;

https://doi.org/10.21799/frbp.wp.2018.11