**Practice** which of the following statements may explain why some small banks may be able to successfully compete with large national banks, despite the fact that the large banks enjoy some significant economies of scale?(I) A small bank may have a team of analysts that are experts in one specific market. Thus, they may be great at knowing whether a firm that operates in that market has a low likelihood of succeeding, and thus can avoid choosing risky clients.(II) A local bank in a small city may know about the reputation of businessmen in that city, or know that some local business is on a clear upward trajectory. Thus, the local bank may have better information about these clients’ likelihoods of defaulting on future loans, compared to national banks that would instead rely on automated processes.(III) The small bank probably a smaller number of clients, and all of them may be in the same city. That means the small bank has a less risky portfolio of clients than the large bank, and thus has a lower cost of funding (because investors see the small bank as a safer investment compared to large banks). a. Only I is correct.b. Only II is correct.c. Only III is correct.d. I and II are correct.e. II and III are correct.
**Practice**
which of the following statements may explain why some small banks may be able to successfully compete with large national banks, despite the fact that the large banks enjoy some significant economies of scale?
(I) A small bank may have a team of analysts that are experts in one specific market. Thus, they may be great at knowing whether a firm that operates in that market has a low likelihood of succeeding, and thus can avoid choosing risky clients.
(II) A local bank in a small city may know about the reputation of businessmen in that city, or know that some local business is on a clear upward trajectory. Thus, the local bank may have better information about these clients’ likelihoods of defaulting on future loans, compared to national banks that would instead rely on automated processes.
(III) The small bank probably a smaller number of clients, and all of them may be in the same city. That means the small bank has a less risky portfolio of clients than the large bank, and thus has a lower cost of funding (because investors see the small bank as a safer investment compared to large banks).
a. Only I is correct.
b. Only II is correct.
c. Only III is correct.
d. I and II are correct.
e. II and III are correct.
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