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Economic Brief

Nov. 13, 2018

Richmond Fed Explores Cyclical Differences Between Small and Large Banks

The Richmond Fed’s latest Economic Brief finds that net interest margins at small banks tend to follow the business cycle while net interest margins at large banks tend to run counter to the business cycle — and offers an explanation for the difference.

Small banks have long been thought to have access to unique, granular information about their borrowers, the kind of information useful in forecasting changes in general business cycle conditions. If so, such information could result in differences in how small and large banks’ net interest margins respond to the business cycle. A recent study from the Richmond Fed finds evidence that, indeed, small and large banks’ margins do respond differently to the business cycle, but those differences are due to small banks’ ability to keep their funding costs relatively stable rather than any ability to glean better information from their relationships with borrowers.

The Richmond Fed’s Economic Brief series provides web-exclusive essays on current economic issues and trends. Sign up to receive an email notification when a new essay is posted.


As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District—including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia—to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.

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