Small banks—those with less than $10 billion in assets—tend to outperform larger banks when it comes to customer service and personal attention. But they also face greater risks in the current economic environment: Quality loan demand is weak; net interest margins - the difference between what a bank pays depositors and what it makes on loans—are low; new regulations increase costs and limit profit-making opportunities especially with fees. As a result smaller banks, who have less cushion than larger institutions to deal with these problems, are trying to make up for lost profits by investing their capital in riskier, longer-term investments. This presents a serious problem, because when interest rates go up, these investments will lose value, forcing the bank to sell them at a loss or keep their money tied up in the investments in lieu of funding better opportunities.
Learn more at American Banker
.Read more Finance Watch articles.