Do Large Banks have Lower Costs? New Estimates of Returns to Scale for U.S. Banks

By David C. Wheelock, Paul Wilson. 2009

301 citations recorded by the source corpus.

The number of commercial banks in the United States has fallen by more than 50 percent since 1984. This consolidation of the U.S. banking industry and the accompanying large increase in average (and median) bank size have prompted concerns about the effects of consolidation and increasing bank size on market competition and on the number of banks that regulators deem “too–big–to–fail.” Agency problems and perverse incentives created by government policies are often cited as reasons why many banks have pursued acquisitions and growth, though bankers often point to economies of scale. This paper presents new estimates of ray-scale and expansion-path scale economies for U.S. banks based on non-parametric local-linear estimation of a model of bank costs. Unlike prior studies that use models with restrictive parametric assumptions or limited samples, our methodology is fully non-parametric and we estimate returns to scale for all U.S. banks over the period 1984–2006. Our estimates indicate that as recently as 2006, most U.S. banks faced increasing returns to scale, suggesting that scale economies are a plausible (but not necessarily only) reason for the growth in average bank size and that the tendency toward increasing scale is likely to continue unless checked by government intervention.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/86a6804e73e7684587b371d08ec2e76226c5d738

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Citations in the corpus

Small Bank Comparative Advantages in Alleviating Financial Constraints and Providing Liquidity Insurance over Time (2017, background): “48 These costs should be added to other social costs of consolidation and must be weighed against the benefits of bank consolidation, such as scale efficiencies enjoyed by large banks (e.g., Berger and Mester, 1997; Wheelock and Wilson, 2012; Hughes and Mester, 2013)).”
The End of Market Discipline? Investor Expectations of Implicit State Guarantees (2013, background): “A growing literature argues that economies exist in banking (Wheelock and Wilson 2001, 2012; Hughes and Mester 2011; McAllister and McManus 1993).”
A varying-coefficient panel data model with fixed effects: Theory and an application to US commercial banks (2017, methodology): “This finding is consistent with Wheelock and Wilson (2012), who, using a nonparametric local-linear estimator to estimate the cost relationship for commercial banks in the U.S. over the period 1984-2006, find that U.S. banks operated under increasing returns to scale.”