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Bank scale economies, mergers, concentration, and efficiency: the U.S. experience

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Author Info

  • Allen N. Berger
  • David B. Humphrey

Abstract

There have been numerous econometric studies of bank scale and scope economies, efficiency, mergers, and market structure and performance in U.S. banking. According to the authors, these studies have come to the following conclusions: Scale: For the very smallest banks, there are scale economies that allow average costs to fall with increases in bank size, but they account for less than 5% of costs. For larger banks, constant average costs or slight diseconomies of scale prevail. Scope: There are at most relatively minor scope economies that reduce cost by 5% or less when multiple products are produced jointly. Revenues appear to be unaffected by product mix. X-Efficiency: Managerial ability to control costs is much more important than scale and scope. Banks may have costs 20% higher than the industry minimum for the same scale and product mix. Mergers: On average, mergers had no significant, predictable effect on cost and efficiency. Market Structure and Bank Performance: Greater local market concentration results in slightly lower deposit rates for small borrowers and slightly higher loan rates for small borrowers. Differences in local market concentration have virtually no effect on bank profitability. The implications of the U.S. experience for Europe are that cross-border mergers and acquisitions by banks in Europe are not like to lower costs by any significant amount. What cost improvements there are will most likely be generated by improvement in X-efficiency, or better management of resources, rather than through improved scale or scope economies. There may be more potential for efficiency gains from mergers on the revenue side than on the cost side, but these have not yet been thoroughly explored. To the degree that cross-border expansions increase local market competition, they may also yield the social benefit of slightly more favorable prices for the consumer of financial services.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 94-23.

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Date of creation: 1994
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Handle: RePEc:fip:fedgfe:94-23

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Related research

Keywords: Banks and banking - Costs ; Banking structure ; Bank mergers;

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References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  1. Allen N. Berger & David B. Humphrey, 1992. "Megamergers in banking and the use of cost efficiency as an antitrust defense," Finance and Economics Discussion Series 203, Board of Governors of the Federal Reserve System (U.S.).
  2. Allen N. Berger & David B. Humphrey, 1990. "The dominance of inefficiencies over scale and product mix economies in banking," Finance and Economics Discussion Series 107, Board of Governors of the Federal Reserve System (U.S.).
  3. Allen N. Berger & Timothy H. Hannan, 1993. "Using efficiency measures to distinguish among alternative explanations of the structure-performance relationship in banking," Finance and Economics Discussion Series 93-18, Board of Governors of the Federal Reserve System (U.S.).
  4. Sam Peltzman, 1977. "The Gains and Losses From Industrial Concentration," NBER Working Papers 0163, National Bureau of Economic Research, Inc.
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  7. Pulley, Lawrence B & Humphrey, David B, 1993. "The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals," The Journal of Business, University of Chicago Press, vol. 66(3), pages 437-62, July.
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  10. Loretta J. Mester, . "Efficiency in the Savings and Loan Industry," Rodney L. White Center for Financial Research Working Papers 26-92, Wharton School Rodney L. White Center for Financial Research.
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Citations

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Cited by:
  1. Magdalena Radulescu & Marinela Tanascovici, 2012. "Profitability of the CEE Banking Systems During the Crisis Period," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 12(1), pages 274-291.
  2. Ramon Caminal & Carmen Matutes, 2002. "Can competition in the credit market be excessive?," UFAE and IAE Working Papers 527.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  3. repec:psl:pslqrr:2010:6 is not listed on IDEAS
  4. Mario Sarcinelli, 2010. "Past and future regulation to prevent a systemic financial crisis," PSL Quarterly Review, Economia civile, vol. 63(253), pages 103-129.

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