The U.S. economy is large and highly diversified producing over $20 trillion in output each year.  Banks of all sizes – large and small – work within this large and diversified economic system to efficiently channel credit from savers to borrowers.  Importantly, large banks are key providers of a range of financial services and support important infrastructures that are necessary to ensure the smooth operation of smaller banks.  In this post, we outline just a few of the ways in which large banks support the operations of smaller banks and the overall economy.

Quite naturally, many people associate banks with loans.  It is of course quite true that making loans is the primary business of banks, but banks also hold other assets in addition to loans.  In particular, banks also hold a range of securities in addition to loans.  Banks hold securities as a store of value as they consider future lending opportunities.  Once a new lending opportunity is identified, some securities can be liquidated to fund the loan.  For smaller banks whose lending opportunities may be more tied to the local economy in which they operate, this motivation for holding securities may be relatively more important.  A smaller community bank may, for example, invest some deposits in high quality government or corporate securities while it waits for more profitable lending opportunities to arise in its local market.

Large banks are a primary provider of security market-making and underwriting services that make it possible for smaller banks to efficiently buy and sell these securities to meet their investment and lending needs.