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Hidden Cost of Better Bank Services

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Hidden Cost of Better Bank Services

Carefree Depositors in Riskier Banks?

Federal Reserve Bank of New York,

5 Minuten Lesezeit
5 Take-aways
Audio & Text

Was ist drin?

Research indicates that banks that offer excellent customer service also carry poor-quality loans.

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Editorial Rating

8

Qualities

  • Analytical
  • Innovative
  • Overview

Recommendation

Many banks in search of deposits to fuel their lending offer depositors expanded ATM networks, more branches, extended hours and other amenities. Generous customer-service practices secure funding at a lower cost to banks; however, an unsettling trade-off emerges. Economists Dong Beom Choi and Ulysses Velasquez explain the paradoxical relationship between broad service options and poor loan quality in this groundbreaking research report. getAbstract highly recommends this academic but insightful study to financial professionals and bank depositors.

Summary

Some banks in the United States use customer deposits primarily to fund their loans. For small banks – those with assets below $1 billion – 70% of their liabilities (a 1995–2014 average) were deposits from customers in their local areas. Executives at banks that rely on deposits use them as a low-cost, stable funding source to generate profitability through lending. These banks align their organizational strategies to attract more deposits by offering customers benefits such as expanded ATM access, convenient branches and hours, and a greater number of employees.

Since they want to realize mainly “transactional or...

About the Authors

Economist Dong Beom Choi and senior analyst Ulysses Velasquez work at the Federal Reserve Bank of New York.

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