EconPapers    
Economics at your fingertips  
 

Do we need big banks? Evidence on performance, strategy and market discipline

Harry Huizinga and Demirgüç-Kunt, Asli
Authors registered in the RePEc Author Service: Asli Demirguc-Kunt

No 8276, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: For an international sample of banks, we construct measures of a bank?s absolute size and its systemic size defined as size relative to the national economy. We then examine how a bank?s risk and return, its activity mix and funding strategy, and the extent to which it faces market discipline depend on both size measures. While absolute size presents banks with a trade-off between risk and return, systemic size is an unmitigated bad, reducing return without a reduction in risk. Despite too-big-to-fail subsidies, we find that systemically large banks are subject to greater market discipline as evidenced by a higher sensitivity of their funding costs to risk proxies, suggesting that they are often too big to save. The finding that a bank?s interest cost tends to rise with its systemic size can also in part explain why a bank?s rate of return on assets tends to decline with systemic size. Overall, our results cast doubt on the need to have systemically large banks. Bank growth has not been in the interest of bank shareholders in small countries, and it is not clear whether those in larger countries have benefited. While market discipline through increasing funding costs should keep systemic size in check, clearly it has not been effective in preventing the emergence of such banks in the first place. Inadequate corporate governance structures at banks seem to have enabled managers to pursue high-growth strategies at the expense of shareholders, providing support for greater government regulation.

Keywords: Market discipline; Systemic risk; Bank size (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2011-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
https://cepr.org/publications/DP8276 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Do we need big banks? Evidence on performance, strategy and market discipline (2013) Downloads
Working Paper: Do We need Big Banks? Evidence on Performance, Strategy and Market Discipline (2011) Downloads
Working Paper: Do We need Big Banks? Evidence on Performance, Strategy and Market Discipline (2011) Downloads
Working Paper: Do We need Big Banks? Evidence on Performance, Strategy and Market Discipline (2011) Downloads
Working Paper: Do we need big banks ? evidence on performance, strategy and market discipline (2011) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:8276

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP8276

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-23
Handle: RePEc:cpr:ceprdp:8276