Jul

18

In the July 14 Wall Street Journal, an article argued that smaller banks—by virtue of their loan portfolios—are better positioned than larger banks to gauge the nation’s economic health. Intrigued, I tested that claim using Federal Reserve weekly data on Commercial & Industrial loans for both large and small banks going back to 1984.

As expected, small-bank lending proved more volatile, but it was consistently less “correct” than large-bank lending. Whether measured by simple rates of change or by shifts in their 12-month trends, large banks outperformed small banks in accuracy. This analysis does not include loan-performance metrics (delinquency or charge-off rates broken out by bank size), which — unsurprisingly — tend to peak during or immediately after recessions.


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