Was There a "Small Bank" Anomaly in the Subprime Crisis?

Drawing on a large set of listed banks from Europe, the US and Japan we start noticing that smaller-sized banks suffered less than larger banks in conjunction with the unfolding of the Great Crisis of 2007-09. Was this a small-bank anomaly analogous to the classic small firm effect? We conjecture that what seems to be a small bank anomaly might, in fact, signal a generalized market reassessment of the banking business model and tested whether stock markets penalized less the banks that kept more rooted to the traditional “originate-to-hold” (OTH) model while forgoing the opportunities disclosed by the “originate-to-distribute” (OTD) model. Using an event study methodology, we focus our analysis on two specific events: i) August 9th 2007, when the main Central Banks were forced to intervene and the world at large learned about the subprime crisis; ii) September 15th 2008, the day in which the bankruptcy of the second largest Wall Street investment bank (Lehman Brothers) surprised many. Our results detect that, indeed, banks that had kept closer to the OTH model – as proxied by a higher net interest income/operating income – experienced less negative abnormal returns. The fact that size is still negative and significant seems to suggest that our proxy for the OTH model may be imperfect and size might still be capturing a residual effect stemming form the banks’ specialization model.