Is the Traditional Banking Model a Survivor?

Abstract

We test whether relatively small US commercial banks that use traditional banking business models are more likely to survive during both good and bad economic climates. Our concept of bank survival is derived from Stigler (1958), and includes any bank that did not fail, was not acquired, and was not absorbed into its parent holding company. Our concept of traditional banking is based on four hallmark characteristics of this business model: Relationship loans, core deposit funding, revenue streams from traditional banking products and services, and physical bank branches. We find that banks that adhered more closely to this business strategy were an estimated 13 percentage points more likely to survive from 1997 through 2012 than banks that used less traditional business strategies. Importantly, the estimated traditional bank survival advantage approximately doubled during the 2006-2012 crisis period compared with the relatively stable 1997-2006 pre-crisis years.

Keywords: bank business model; financial crisis; survivorship

JEL Classification: G21