Financial Stability News

News about financial stability and central banking

Small banks are back

There has been some positive press about the beauty of small banks recently. Gillian Tett observed that small banks in the US are upbeat and doing well, and Ben Bernanke addressed the same topic at a recent FDIC conference where he supported their growth and support for small communities.

This is old news to Hyman Minsky, who back in the 90s was a strong advocate for smaller “Community Development Banks”. He criticized the TBTF long before the recent crisis and argued that small, locally based banks would be better for growth and investment. It’s interesting to note that his position is gaining traction, even in the Fed.

For those interested, there is a PhD thesis out by Morten Josefson of Norwegian Business School BI that actually proves that small owner-less savings banks in Norway are doing a better job (more profits) than their larger commercial bank peers. Quite interesting indeed, and as he notes contrary to the main findings of finance theory. His conclusion (on page 34 of the first paper: Stakeholder rights and economic performance: The profitability of nonprofits) is modestly stated as follows:

Our results do not support the idea that performance is higher the more profit-dominated the firm’s objectives and the stronger the ownership rights of the capital providers. After having accounted for differences in risk, size, and unobservable firm and industry effects, we find that owner-less firms are not outperformed by firms owned fully or partially by stockholders.

Quite some conclusion!

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