Community banks (CBs), despite holding a fairly small share of US banking assets, provide vital financial services to key segments of the economy and fill a void untapped by larger non‐community banks (Non‐CBs). They face challenges brought on by a fast‐changing banking landscape, evolving technology, and ever‐increasing regulatory burden. To remain competitive and to gain scale‐related efficiencies, CBs have been seeking mergers even as greater institutional size causes a departure from the classical relationship‐based business model. This study examines performance of US CBs and Non‐CBs post the Great Recession to reveal how size of these institutions may affect their business operations. Empirical findings show that CBs, compared with their larger counterparts, tend to maintain higher levels of liquidity and lower levels of capital, and demonstrate a greater dependence on core deposits, confirming that CBs focus on deposit taking and soft information‐based lending strategies. Furthermore, this study suggests that CBs should not be considered a homogenous group operating under a singular business model and cautions that regulatory dialectics aimed at the banking industry should not employ a one‐size‐fits‐all approach.

Su-Jane Chen, De part ment of Fi nance, Met ro pol i tan State Col lege of Den ver; Tung-Zong Chang, De part ment of Mar ket ing, Met ro pol i tan State Col lege of Den ver, Tif fany Hui-Kuang Yu, De part ment of Pub lic Fi nance, Feng Chia Uni ver sity and Tim o thy Mayes, De part ment of Fi nance, Met ro poli tan State Col lege of Den ver Ab stractThis study in ves ti gates the eco nomic con tent of the two firm-specific char acter is tics, size and book-to-market eq uity. Size is found to be sig nifi cantly related to a com bi na tion of be tas on all of the mac ro vari ables pro posed in this re search. Its sig nifi cance per sists through out the en tire sam ple pe riod. This pro vides fur ther evi dence that size is a proxy for per va sive risk fac tors in the stock mar ket. The sup port for book-to-market eq ui ty's role as a risk proxy is also evi denced, how ever to a lesser ex tent. Se cu ri ties are then sorted into size and book-to-market eq uity port fo lios and their ef fects on in vest ment de cisions are ex am ined in the con text of mac ro vari ables. Im por tant in vest ment im pli ca tions are drawn based on the find ings.

PurposeThe purpose of this paper is to better understand the differences between community and non-community banks (CBs and Non-CBs) in the US. As the former have been declining in numbers, previous literature shows inherent differences between the business models of CBs and Non-CBs. This study attempts to gauge whether the impact of the reserve elimination during the Covid pandemic affected all banks similarly or whether community banks showed a differentiated response.Design/methodology/approachOn March 26, 2020, the Federal Reserve, at the onset of the Covid pandemic, altered the depository institution reserve requirement for the first time since 1992. This significant change in policy led to the reserve requirement reduction from 10% to 0%. This study examines the impact of the 2020 reserve elimination on all community banks and non-community banks in the US and finds that although the level of cash to assets increased at both types of depository institutions post reserve elimination, the impact on liquidity-focused ratios was more pervasive at community banks in the first quarter post the regulatory shift. Among community banks, the largest depository institutions experienced the biggest balance sheet adjustments in the June 2020 quarter that followed the change in Federal Reserve’s policy. Further, the study finds that over two-quarters post reserve elimination, the non-community banks demonstrate a greater increase in balance sheet liquidity. Past literature shows that community banks tend to carry more liquidity than non-community banks and small community banks tend to carry more liquidity than their larger counterparts. These previous findings may provide some explanation for the different speed documented in this study at which various banks have reacted to the reserve elimination in 2020.FindingsThis research finds that community banks had a quicker response to the change in the reserve elimination, showing quick increases across liquidity ratios. The larger non-community banks tended to play catch up, increasing their liquidity in the subsequent quarter. The study also shows that the changes in liquidity were initially driven by the segment of large community banks.Originality/valueThis study looks at how the reserve elimination enacted by the Federal Reserve in March 2020 in response to the Covid pandemic affected community versus non-community banks. Currently, as far as the authors know, there are no other published papers that look at this issue.