In recent years, community bankers and industry analysts have become concerned that small banks may need to grow larger to be successful. New electronic banking platforms—along with new regulations introduced after the 2007–09 financial crisis and recession—have increased fixed costs for all banks, which could place smaller banks at a competitive disadvantage relative to their larger competitors. Kristen Regehr and Rajdeep Sengupta examine whether the relationship between bank size and profitability has changed since the financial crisis. They find that the relationship has remained stable over time: both before and after the crisis, profitability increased with bank size but at a decreasing rate. Moreover, they find that banks need not grow larger to be successful: in achieving higher profitability, small differences in bank- and market-specific factors are equivalent to large differences in size.

PDFRead More

Author

Rajdeep Sengupta

Senior Economist

Rajdeep Sengupta is a senior economist at the Federal Reserve Bank of Kansas City. He joined the Kansas City Fed in July 2013. His research areas are banking, financial intermedi…