As technology advances and regulatory barriers drop, small-business lending may be banks' last traditional stronghold, according to a Federal Reserve Bank of St. Louis economist.
"The only arena in which banks may continue to have a clear advantage is in lending to small firms," Mark D. Vaughn writes in The Regional Economist, a publication of the St. Louis Fed.
The article, "Bullish on Banking: Thriving in the Information Age," disputes the notion that banking is a dying business, but Mr. Vaughn does conclude "banks will probably lose market share in the future."
Still, Mr. Vaughn said in an interview Tuesday that banks will find new ways to compete as the market evolves. "Banks have risen to the competitive challenge and found a way to make money off-balance-sheet," he said.
For example, he said, banks recouped some of the loan revenue lost to commercial paper by becoming a crucial player in that market. And banks offer liquidity and even credit enhancements that companies issuing commercial paper need to secure rating agencies' approval.
"They may not be booking income from loans on their balance sheet, but they've found ways to enhance the market and make money."