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Federal Reserve Bank of Richmond
Richmond Fed Economic Brief
The Differing Effects of the Business Cycle on Small and Large Banks
Borys Grochulski
Daniel Schwam
Aaron Steelman
Yuzhe Zhang
Abstract

Small banks and large banks respond differently to business cycle fluctuations. The average net interest margin (NIM) at large banks is negatively correlated with the business cycle, while the average NIM at small banks is positively correlated with the business cycle. In a popular view, small banks are different from large banks because of their close relationships with their borrowers. But a decomposition of the cyclical properties of NIM into the asset and liability sides of the balance sheet suggests that small banks' procyclical NIM is due to their ability to keep funding costs less sensitive to the business cycle.


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Borys Grochulski & Daniel Schwam & Aaron Steelman & Yuzhe Zhang, "The Differing Effects of the Business Cycle on Small and Large Banks" , Federal Reserve Bank of Richmond, Richmond Fed Economic Brief, issue November, pages 1-4, 2018.
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Keywords: Banking; Net Interest Margin; nim; business cycles
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