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Regulatory Optimal Bank Size

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  • Randall McFadden

Abstract

This paper presents a study of potential outcomes of bank growth. Banks grow by expanding market presence within the geographic region within which they are domiciled and by expanding presence into other regions via new implantations. Growth leads to improved diversification, but also results in an increase in the risk of catastrophe that a bank’s failure may engender. The conclusion is that there will exist a threshold size of bank at which the rate of growth in its systemic risk exceeds the rate of decline in its risk of insolvency. An empirical study of US bank call report data provides results that are consistent with the theory presented in the first part of the paper. Copyright International Atlantic Economic Society 2008

Suggested Citation

  • Randall McFadden, 2008. "Regulatory Optimal Bank Size," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 14(2), pages 142-155, May.
    • Handle: RePEc:kap:iaecre:v:14:y:2008:i:2:p:142-155:10.1007/s11294-008-9138-y
    DOI: 10.1007/s11294-008-9138-y
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    Cited by:

    1. Akhigbe, Aigbe & Madura, Jeff & Marciniak, Marek, 2012. "Bank capital and exposure to the financial crisis," Journal of Economics and Business, Elsevier, vol. 64(5), pages 377-392.

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    More about this item

    Keywords

    Banks; Systemic risk; Diversification; Optimal size; D21; E50; G20; L10; R10;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • R10 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General

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