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Do big banks have lower operating costs?

Anna Kovner, James Vickery () and Lily Zhou

Economic Policy Review, 2014, issue Dec, 27 pages

Abstract: This study examines the relationship between bank holding company (BHC) size and components of noninterest expense (NIE) in order to shed light on the sources of scale economies in banking. Drawing on detailed expense information provided by U.S. banking firms in the memoranda of their regulatory filings, the authors find a robust negative relationship between size and normalized measures of NIE. The relationship is strongest for employee compensation expenses and components of ?other? noninterest expense such as information technology and corporate overhead expenses. In addition, the authors find no evidence that the inverse relationship between banking firm size and NIE ratios disappears above a given size threshold. In dollar terms, their estimates imply that for a BHC of mean size, an additional $1 billion in assets reduces noninterest expense by $1 million to $2 million per year, relative to a base case in which operating cost ratios are unrelated to size.

Keywords: banking; economies of scale; too-big-to-fail (search for similar items in EconPapers)
JEL-codes: G20 G21 (search for similar items in EconPapers)
Date: 2014
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Journal Article: Do big banks have lower operating costs? (2015)
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