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Economies of integration in banking: an application of the survivor principle

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  • Timothy J. Yeager
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    Abstract

    Despite the growing concentration of U.S. banking assets in mega-banks, most academic research finds that scale and scope economies are small. I apply the survivor principle to the banking industry between 1984 and 2002 and find that the so-called economies of integration are significant. These results hold after accounting for off-balance- sheet activities and after replicating the results at the holding company level. Regression analysis reveals that deregulation of branching restrictions, especially at the state level, played a significant role in allowing banks to exploit these economies. The results also suggest that, although the absolute number of community banks will decrease over time, community banks of all sizes will remain viable in the future. A likely explanation for the paradox of significant economies of integration and small estimated cost economies is that the size benefits to a bank come from sources other than cost efficiencies.

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    File URL: http://www.stlouisfed.org/banking/pdf/SPA/SPA_2004_04.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of St. Louis in its series Supervisory Policy Analysis Working Papers with number 2004-04.

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    Date of creation: 2004
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    Handle: RePEc:fip:fedlsp:2004-04

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    Keywords: Financial institutions ; Banks and banking;

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    1. John H. Boyd & Mark Gertler, 1994. "Are banks dead? or, are the reports greatly exaggerated?," Proceedings 25, Federal Reserve Bank of Chicago.
    2. John H. Boyd & Mark Gertler, 1993. "U.S. Commercial Banking: Trends, Cycles, and Policy," NBER Chapters, in: NBER Macroeconomics Annual 1993, Volume 8, pages 319-377 National Bureau of Economic Research, Inc.
    3. Cornett, Marcia Millon & Tehranian, Hassan, 1992. "Changes in corporate performance associated with bank acquisitions," Journal of Financial Economics, Elsevier, vol. 31(2), pages 211-234, April.
    4. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, 1996. "The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function," Center for Financial Institutions Working Papers 96-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
    5. McAllister, Patrick H. & McManus, Douglas, 1993. "Resolving the scale efficiency puzzle in banking," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 389-405, April.
    6. Keeler, Theodore E, 1989. "Deregulation and Scale Economies in the U.S. Trucking Industry: An Econometric Extension of the Survivor Principle," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages 229-53, October.
    7. Frech, H E, III & Ginsburg, Paul B, 1974. "Optimal Scale in Medical Practice: A Survivor Analysis," The Journal of Business, University of Chicago Press, vol. 47(1), pages 23-36, January.
    8. Blair, Roger D & Vogel, Ronald J, 1978. "A Survivor Analysis of Commercial Health Insurers," The Journal of Business, University of Chicago Press, vol. 51(3), pages 521-29, July.
    9. Leonard W. Weiss, 1964. "The Survival Technique and the Extent of Suboptimal Capacity," Journal of Political Economy, University of Chicago Press, vol. 72, pages 246.
    10. Calomiris, Charles W., 1999. "Gauging the efficiency of bank consolidation during a merger wave," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 615-621, February.
    11. William Emmons & R. Gilbert & Timothy Yeager, 2004. "Reducing the Risk at Small Community Banks: Is it Size or Geographic Diversification that Matters?," Journal of Financial Services Research, Springer, vol. 25(2), pages 259-281, April.
    12. Rhoades, Stephen A., 1993. "Efficiency effects of horizontal (in-market) bank mergers," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 411-422, April.
    13. Jagtiani, Julapa & Nathan, Alli & Sick, Gordon, 1995. "Scale economies and cost complementarities in commercial banks: On-and off-balance-sheet activities," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1175-1189, October.
    14. Berger, Allen N. & Hunter, William C. & Timme, Stephen G., 1993. "The efficiency of financial institutions: A review and preview of research past, present and future," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 221-249, April.
    15. David B. Humphrey, 1990. "Why do estimates of bank scale economies differ?," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 38-50.
    16. Mitchell, Karlyn & Onvural, Nur M, 1996. "Economies of Scale and Scope at Large Commercial Banks: Evidence from the Fourier Flexible Functional Form," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(2), pages 178-99, May.
    17. Roger Blair & Jill Herndon, 1994. "A Survivor Test of the American Agency System of Distributing Property Liability Insurance," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 1(2), pages 283-290.
    18. Theodore E. Keeler., 1989. "Deregulation and Scale Economies in the U. S. Trucking Industry: An Econometric Extension of the Survivor Principle," Economics Working Papers 89-100, University of California at Berkeley.
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