Article

The Effects of Size on Local Banks' Funding Costs

Department of Finance, Goethe University Frankfurt am Main, Working Paper Series: Finance and Accounting 01/2008;
Source: RePEc

ABSTRACT Motivated by the recent discussion of the declining importance of deposits as banks' major source of funding we investigate which factors determine funding costs at local banks. Using a panel data set of more than 800 German local savings and cooperative banks for the period from 1998 to 2004 we show that funding costs are not only driven by the relative share of comparatively cheap deposits of bank's liabilities but among other factors especially by the size of the bank. In our empirical analysis we find strong and robust evidence that, ceteris paribus, smaller banks exhibit lower funding costs than larger banks suggesting that small banks are able to attract deposits more cheaply than their larger counterparts. We argue that this is the case because smaller banks interact more personally with customers, operate in customers' geographic proximity and have longer and stronger relationships than larger banks and, hence, are able to charge higher prices for their services. Our finding of a strong influence of bank size on funding costs is also in an international context of great interest as mergers among small local banks - the key driver of bank growth - are a recent phenomenon not only in European banking that is expected to continue in the future. At the same time, net interest income remains by far the most important source of revenue for most local banks, accounting for approximately 70% of total operating revenues in the case of German local banks. The influence of size on funding costs is of strong economic relevance: our results suggest that an increase in size by 50%, for example, from EUR 500 million in total assets to EUR 750 million (exemplary for M&A transactions among local banks) increases funding costs, ceteris paribus, by approximately 18 basis points which relates to approx. 7% of banks' average net interest margin.

0 Bookmarks
 · 
42 Views
  • American Economic Review 02/1991; 81(4):938-45. · 2.69 Impact Factor
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: This article designs a framework for evaluating the causes, consequences, and future implications of financial services industry consolidation, reviews the extant research literature within the context of this framework (over 250 references), and suggests fruitful avenues for future research. The evidence is consistent with increases in market power from some types of consolidation; improvements in profit efficiency and diversification of risks, but little or no cost efficiency improvement on average; relatively little effect on the availability of services to small customers; potential improvements in payments system efficiency; and potential costs on the financial system from increases in systemic risk or expansion of the financial safety net.
    Journal of Banking & Finance. 02/1998;
  • [Show abstract] [Hide abstract]
    ABSTRACT: During the nineties, Europe became a major recipient of FDIs but Italian regions have been largely excluded from this process. Was it due to their characteristics, or were Italian regions “doomed” by a negative country effect? In this paper we address this issue by estimating the determinants of multinational firms’ location choices in 52 EU regions. We find that Italian regions indeed attracted significantly less than their observable potential, and that this could be explained by the inefficiency of the bureaucratic apparatus and of the legal system. The effect of taxes is instead strongly sensitive to the inclusion of agglomeration variables and is asymmetric across regions.
    Journal of Financial and Quantitative Analysis 01/1988; 23(02):231-235. · 1.77 Impact Factor

Full-text

View
0 Downloads
Available from