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

44 Pages Posted: 15 May 2018 Last revised: 21 Feb 2019

See all articles by Joseph P. Hughes

Joseph P. Hughes

Rutgers, The State University of New Jersey - Department of Economics

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Choon-Geol Moon

Hanyang University

Date Written: 2018-03-13

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

Suggested Citation

Hughes, Joseph P. and Jagtiani, Julapa and Mester, Loretta J. and Moon, Choon-Geol, Does Scale Matter in Community Bank Performance? Evidence Obtained by Applying Several New Measures of Performance (2018-03-13). FRB of Philadelphia Working Paper No. 18-11. Available at SSRN: https://ssrn.com/abstract=3178436 or http://dx.doi.org/10.21799/frbp.wp.2018.11

Joseph P. Hughes (Contact Author)

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland

East 6th & Superior
Cleveland, OH 44101-1387
United States

Choon-Geol Moon

Hanyang University ( email )

17 Haegdang-dong
Seongdong-ku
Seoul, 133-791
KOREA

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