Bank Size and Household Financial Sentiment: Surprising Evidence from the University of Michigan Surveys of Consumers

Abstract

We analyze comparative advantages/disadvantages of small and large banks in improving household sentiment regarding financial conditions. We match sentiment data from the University Of Michigan Surveys Of Consumers with local banking market data from 2000 to 2014. Surprisingly, the evidence suggests that large rather than small banks have significant comparative advantages in boosting household sentiment. Findings are robust to instrumental variables and other econometric methods. Additional analyses are consistent with both scale economies and the superior safety of large banks as channels behind the main findings. These channels appear to more than offset stronger relationships with and greater trust in small banks.

Keywords: households, financial sentiment, small banks, large banks, banking market structure

JEL Classification: G21, G28, G34