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The Differing Effects of the Business Cycle on Small and Large Banks, No. 18-11

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The Differing Effects of the Business Cycle on Small and Large Banks, No. 18-11

DATE: November 2018

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ABSTRACT: Small banks and large banks respond differently to business cycle fluctuations. The average net interest margin (NIM) at large banks is negatively correlated with the business cycle, while the average NIM at small banks is positively correlated with the business cycle. In a popular view, small banks are different from large banks because of their close relationships with their borrowers. But a decomposition of the cyclical properties of NIM into the asset and liability sides of the balance sheet suggests that small banks' procyclical NIM is due to their ability to keep funding costs less sensitive to the business cycle.

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Grochulski, Borys , Schwam, Daniel , Steelman, Aaron , Zhang, Yuzhe and Federal Reserve Bank of Richmond. "The Differing Effects of the Business Cycle on Small and Large Banks, No. 18-11," Economic Brief (November 2018). https://fraser.stlouisfed.org/title/6034/item/583978, accessed on September 26, 2023.

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