The Largest Banks Now Lead the Industry in Cost of Funding Earning Assets

We have become used to observing large banks having a low cost of funds over long periods of time.  I am guessing that if I asked most bank executives who has the lowest cost of funds, they would say large banks.  Bankers, that is not true today.

This graphic from www.fdic.gov displays a dramatic shift in recent quarters.  You can find it by selecting the tab labeled "AVGFUNDEXPENSE".

How do you explain this?   If the lowest cost of funds was the ultimate objective it would seem that small banks are winning.  But, is that really true?  How can community bankers maximize profits?  Could it be that excessive pinching of pennies when it comes to depositors is detrimental?

Never forget that Marginal Revenue is just as important in the profit maximization formula as the Marginal Cost.  You know Marginal Cost because you constantly hear about it from most consultants who are helping you see the benefits of alternative market channels, brokered deposits, and listing services.   It is marginal revenue that is driving profit optimizing bankers to take market share from those who are using antiquated approaches locally and becoming dependent upon non-local funding.  The minimum marginal revenue for deposit today is effective fed funds ~ 5.33%.  How is your bank adjusting to this in order to maximize profits?