The Evolution of Scale Economies in U.S. Banking

David Wheelock and Paul Wilson

No 2015-21, Working Papers from Federal Reserve Bank of St. Louis

Abstract: Continued consolidation of the U.S. banking industry and a general increase in the size of banks has prompted some policymakers to consider policies that discourage banks from getting larger, including explicit caps on bank size. However, limits on the size of banks could entail economic costs if they prevent banks from achieving economies of scale. This paper presents new estimates of returns to scale for U.S. banks based on nonparametric, local-linear estimation of bank cost, revenue and profit functions. We report estimates for both 2006 and 2015 to compare returns to scale some seven years after the financial crisis and five years after enactment of the Dodd-Frank Act with returns to scale before the crisis. We find that a high percentage of banks faced increasing returns to scale in cost in both years, including most of the 10 largest bank holding companies. And, while returns to scale in revenue and profit vary more across banks, we find evidence that the largest four banks operate under increasing returns to scale.

Keywords: banks; returns to scale; scale economies; nonparametric; regression. (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 G21 L11 (search for similar items in EconPapers)
Pages: 89 pages
Date: 2015-08-01
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (4)

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Journal Article: The evolution of scale economies in US banking (2018)
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DOI: 10.20955/wp.2015.021

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