Summary of Hidden Cost of Better Bank Services

Carefree Depositors in Riskier Banks?

Federal Reserve Bank of New York,

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Hidden Cost of Better Bank Services summary
Research indicates that banks that offer excellent customer service also carry poor-quality loans.

Rating

8 Overall

8 Importance

9 Innovation

7 Style

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.

In this summary, you will learn

  • How extensive customer-service offerings and low-cost bank funding are related
  • How negative trade-offs result in poor loan quality and riskier assets
 

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...
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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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