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Bank Scale Economies, Mergers, Concentration, and Efficiency: The U.S. Experience

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Author Info
Allen Berger
David Humphrey

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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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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 94-25.

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Date of creation: Jul 1994
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Handle: RePEc:wop:pennin:94-25

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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.:
  1. 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," Journal of Business, University of Chicago Press, vol. 66(3), pages 437-62, July. [Downloadable!] (restricted)
  2. Clark, Jeffrey A, 1984. "Estimation of Economies of Scale in Banking Using a Generalized Functional Form," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 53-68, February. [Downloadable!] (restricted)
  3. Berger, Allen N. & Hanweck, Gerald A. & Humphrey, David B., 1987. "Competitive viability in banking : Scale, scope, and product mix economies," Journal of Monetary Economics, Elsevier, vol. 20(3), pages 501-520, December. [Downloadable!] (restricted)
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  4. Benston, George J, 1972. "Economies of Scale of Financial Institutions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 4(2), pages 312-41, May. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. Sherrill Shaffer, 1988. "A revenue-restricted cost study of 100 large banks," Research Paper 8806, Federal Reserve Bank of New York.
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  7. Neumark, David & Sharpe, Steven A, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 657-80, May. [Downloadable!] (restricted)
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  8. Aruna Srinivasan, 1992. "Are there cost savings from bank mergers?," Economic Review, Federal Reserve Bank of Atlanta, issue Mar, pages 17-28.
  9. Berger, Allen N & Hannan, Timothy H, 1989. "The Price-Concentration Relationship in Banking," The Review of Economics and Statistics, MIT Press, vol. 71(2), pages 291-99, May. [Downloadable!] (restricted)
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  10. Berger, Allen N. & Hancock, Diana & Humphrey, David B., 1993. "Bank efficiency derived from the profit function," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 317-347, April. [Downloadable!] (restricted)
  11. Rhoades, Stephen A., 1985. "Market share as a source of market power: Implications and some evidence," Journal of Economics and Business, Elsevier, vol. 37(4), pages 343-363, December. [Downloadable!] (restricted)
  12. Smirlock, Michael & Gilligan, Thomas & Marshall, William, 1986. "Tobin's q and the Structure-Performance Relationship: Reply," American Economic Review, American Economic Association, vol. 76(5), pages 1211-13, December. [Downloadable!] (restricted)
  13. Aruna Srinivasan & Larry D. Wall, 1992. "Cost savings associated with bank mergers," Working Paper 92-2, Federal Reserve Bank of Atlanta.
  14. Noulas, Athanasios G & Ray, Subhash C & Miller, Stephen M, 1990. "Returns to Scale and Input Substitution for Large U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 94-108, February. [Downloadable!] (restricted)
  15. Berger, Allen N. & Humphrey, David B., 1991. "The dominance of inefficiencies over scale and product mix economies in banking," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 117-148, August. [Downloadable!] (restricted)
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  16. Mester, Loretta J, 1987. " A Multiproduct Cost Study of Savings and Loans," Journal of Finance, American Finance Association, vol. 42(2), pages 423-45, June. [Downloadable!] (restricted)
  17. Buono, Mark J. & Eakin, B. Kelly, 1990. "Branching restrictions and banking costs," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1151-1162, December. [Downloadable!] (restricted)
  18. 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.).
  19. Mester, Loretta J., 1993. "Efficiency in the savings and loan industry," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 267-286, April. [Downloadable!] (restricted)
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  20. Smirlock, Michael & Gilligan, Thomas & Marshall, William, 1984. "Tobin's q and the Structure-Performance Relationship," American Economic Review, American Economic Association, vol. 74(5), pages 1051-60, December. [Downloadable!] (restricted)
  21. Sam Peltzman, 1977. "The Gains and Losses From Industrial Concentration," NBER Working Papers 0163, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  22. Aly, Hassan Y, et al, 1990. "Technical, Scale, and Allocative Efficiencies in U.S. Banking: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 211-18, May. [Downloadable!] (restricted)
  23. Schranz, Mary S, 1993. "Takeovers Improve Firm Performance: Evidence from the Banking Industry," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 299-326, April. [Downloadable!] (restricted)
  24. 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. [Downloadable!] (restricted)
  25. Lambson, Val Eugene, 1987. "Is the Concentration-Profit Correlation Partly an Artifact of Lumpy Technology?," American Economic Review, American Economic Association, vol. 77(4), pages 731-33, September. [Downloadable!] (restricted)
  26. Shepherd, William G, 1986. "Tobin's q and the Structure-Performance Relationship: Comment," American Economic Review, American Economic Association, vol. 76(5), pages 1205-10, December. [Downloadable!] (restricted)
  27. 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.).
  28. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law & Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
  29. Allen N. Berger & David B. Humphrey, 1992. "Measurement and Efficiency Issues in Commercial Banking," NBER Chapters, in: Output Measurement in the Service Sectors, pages 245-300 National Bureau of Economic Research, Inc. [Downloadable!]
  30. Jeffrey A. Clark, 1988. "Economies of scale and scope at depository financial institutions: a review of the literature," Economic Review, Federal Reserve Bank of Kansas City, issue Sep, pages 16-33. [Downloadable!]
  31. Benston, George J & Hanweck, Gerald A & Humphrey, David B, 1982. "Scale Economies in Banking: A Restructuring and Reassessment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 435-56, November. [Downloadable!] (restricted)
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  32. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. 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). [Downloadable!]
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