How do banks make money? A variety of business strategies
Last Updated: 11/08/04
This is the second of two companion pieces on “How do banks make money?” appearing in this issue of Economic Perspectives. In the first article, we focus on the remarkable increase in noninterest income at U.S. commercial banks during the past two decades, the regulatory and technological catalysts for this historic change, and how this newfound reliance on noninterest income can affect bank performance. In this article, we explain how deregulation and technological change have encouraged U.S. commercial banks to become less like each other in virtually all aspects of their operations—including the generation of noninterest income—and how the resulting divergence in banking strategies has affected the financial performance of these companies. We define a variety of banking business strategies based on differences in product mix, funding sources, geographic focus, production techniques, and other dimensions, and examine the financial performance of established U.S. banking companies that used these strategies from 1993 through 2003. While we recognize that bank size can have implications for strategic choice and financial performance, we do not use bank size to define any of the strategy groups.