According to DeYoung et al. [Journal of Financial Services Research, 2004] deregulation and technological change has divided the US banking industry into two primary size-based groups: very large banks, specializing in the use of “hard” information to make standardized loans and smaller banks, specializing in the use of “soft” information and relationship development to make non-standardized loans. We evaluate business-lending performance for small and large banks over the 1993–2001 period. Small business lending by small banks is characterized by relationship development and non-standardized loans. Consistent with DeYoung et al.'s model, we find that, after controlling for market concentration, cost of funds, and a variety of other factors that might influence yields, smaller banks perform better than larger banks in the small business lending market. However, larger banks appear to have the advantage in credit card lending, a market characterized by impersonal relationships and standardized loans. Interestingly, we find evidence that larger banks have been making inroads in the market for the smallest business loans, a result consistent with the use of credit scoring by large banks to make very small business loans [Berger et al., Journal of Money, Credit, and Banking, 2004].

From March through May of 1994, several large nonfinancial firms announced millions of dollars in losses from derivatives deals, especially those arranged by Bankers Trust. Accompanying these announcements and related news stories were allegations that Bankers Trust had either misrepresented, lied, or deceived its clients. Using SUR methods, we investigate how these announcements affected Bankers Trust and three portfolios of banks: dealers, nondealers, and nonusers. Our results indicate significant cumulative abnormal returns of −12.14% (Bankers Trust), −5.56% (13 dealer banks), and −2.45% (32 nondealer, user banks). The evidence suggests an intra-industry, information-transfer effect consistent with rational pricing. The replacement cost of derivative contracts is an important factor in explaining the variation in abnormal returns across banks.