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Do big banks have lower operating costs?

Author

Listed:
  • Kovner, Anna

    (Federal Reserve Bank of New York)

  • Vickery, James

    (Federal Reserve Bank of New York)

  • Zhou, Lily

    (Sciences Po)

Abstract

We examine the relationship between bank holding company (BHC) size and components of non-interest expense (NIE), in order to shed light on the sources of scale economies in banking. Drawing on detailed expense information provided by U.S. banking firms in the memoranda of their regulatory filings, we find a robust negative relationship between size and normalized measures of NIE. The relationship is strongest for employee compensation expenses and components of “other” NIE, such as information technology and corporate overhead expenses. In addition, the authors find no evidence that the inverse relationship between banking firm size and NIE ratios disappears above a given size threshold. In dollar terms, their estimates imply that for a BHC of mean size, an additional U.S.$1 billion in assets reduces NIE by U.S.$1 million to U.S.$2 million per year, relative to a base case where operating cost ratios are unrelated to size.

Suggested Citation

  • Kovner, Anna & Vickery, James & Zhou, Lily, 2015. "Do big banks have lower operating costs?," Journal of Financial Perspectives, EY Global FS Institute, vol. 3(1), pages 157-196.
  • Handle: RePEc:ris:jofipe:0064
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    Cited by:

    1. Joseph P. Hughes & Julapa Jagtiani & Loretta J. Mester, 2016. "Is Bigger Necessarily Better in Community Banking?," Working Papers (Old Series) 1615, Federal Reserve Bank of Cleveland.
    2. Gregory McKee & Albert Kagan, 2019. "The differential impact of the Dodd–Frank Act on niche non-metro lenders," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(4), pages 291-301, December.
    3. Kilian Huber, 2021. "Are Bigger Banks Better? Firm-Level Evidence from Germany," Journal of Political Economy, University of Chicago Press, vol. 129(7), pages 2023-2066.
    4. Sapci, Ayse & Miles, Bradley, 2019. "Bank size, returns to scale, and cost efficiency," Journal of Economics and Business, Elsevier, vol. 105(C).
    5. Hughes, Joseph P. & Jagtiani, Julapa & Mester, Loretta J. & Moon, Choon-Geol, 2019. "Does scale matter in community bank performance? Evidence obtained by applying several new measures of performance," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 471-499.
    6. Javed Ahmed & Christopher Anderson & Rebecca Zarutskie, 2015. "Are the Borrowing Costs of Large Financial Firms Unusual?," Working Papers 15-10, Office of Financial Research, US Department of the Treasury.
    7. Beverly Hirtle & Anna Kovner & Matthew Plosser, 2020. "The Impact of Supervision on Bank Performance," Journal of Finance, American Finance Association, vol. 75(5), pages 2765-2808, October.
    8. Philippon, Thomas, 2016. "The FinTech Opportunity," CEPR Discussion Papers 11409, C.E.P.R. Discussion Papers.
    9. Q. Farooq Akram & Casper Christophersen, 2017. "Pricing in the Norwegian Interbank Market – the Effects of Liquidity and Implicit Government Support," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(2), pages 165-204, April.
    10. Glass, Anthony J. & Kenjegaliev, Amangeldi & Kenjegalieva, Karligash, 2020. "Spatial scale and product mix economies in U.S. banking with simultaneous spillover regimes," European Journal of Operational Research, Elsevier, vol. 284(2), pages 693-711.
    11. W. Scott Frame & Ping McLemore & Atanas Mihov, 2020. "Haste Makes Waste: Banking Organization Growth and Operational Risk," Working Papers 2023, Federal Reserve Bank of Dallas.
    12. Ma, Chang & Nguyen, Xuan-Hai, 2021. "Too big to fail and optimal regulation," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 747-758.
    13. Thomas M. Eisenbach & David O. Lucca & Robert M. Townsend, 2022. "Resource Allocation in Bank Supervision: Trade‐Offs and Outcomes," Journal of Finance, American Finance Association, vol. 77(3), pages 1685-1736, June.
    14. Coeuré, B., 2015. "Completing the single market in capital," Financial Stability Review, Banque de France, issue 19, pages 15-24, April.
    15. Bernadette A Minton & René M Stulz & Alvaro G Taboada, 2019. "Are the Largest Banks Valued More Highly?," Review of Financial Studies, Society for Financial Studies, vol. 32(12), pages 4604-4652.
    16. Schlam, Carina & Woyand, Corinna, 2023. "The rollout of internal credit risk models: Implications for the novel partial-use philosophy," Discussion Papers 07/2023, Deutsche Bundesbank.
    17. Pierri, Nicola & Timmer, Yannick, 2022. "The importance of technology in banking during a crisis," Journal of Monetary Economics, Elsevier, vol. 128(C), pages 88-104.
    18. Wang, Yang & Xiuping, Sui & Zhang, Qi, 2021. "Can fintech improve the efficiency of commercial banks? —An analysis based on big data," Research in International Business and Finance, Elsevier, vol. 55(C).
    19. Tijmen Daniels & Shahin Kamalodin, 2016. "The Return on Equity of Large Dutch Banks," DNB Occasional Studies 1405, Netherlands Central Bank, Research Department.
    20. Goodhart, Charles & Avgouleas, Emilios, 2014. "A Critical Evaluation of Bail-in as a Bank Recapitalisation Mechanism," CEPR Discussion Papers 10065, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Banking; regulations;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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