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date: 26 March 2019

Abstract and Keywords

This article discusses in detail the evolution of the US banking industry over the past twenty-five years. It examines how deregulation, technological change, and financial innovation have affected industry structure and the strategies banks pursue. It presents evidence suggesting that small and large banks can coexist in long-run equilibrium by pursuing very different strategies. In such an equilibrium, large banks use advantages afforded by scale to pursue a transaction-based banking business model, which relies on technology and hard information, while small banks maintain a geographically focused strategy to build and maintain long-term lending relationships. Large banks can thus produce high-volume standardized products at low cost, while small banks can produce lower volumes of more tailored products at a higher price.

Keywords: US banking industry, deregulation, technological change, financial innovation, large banks, small banks

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