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Bankers and bank investors: Reconsidering the economies of scale in banking

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  • Anderson, Ronald W.
  • Jõeveer, Karin

Abstract

We study economies of scale in banking by viewing banks as combinations of financial and human capital that create rents which accrue to investors and bankers. Applying this approach to annual data of US bank holding companies since 1990, we find much stronger evidence of economies of scale in returns to bankers as compared to returns to investors. The scale economies appear to be particularly strong in the top size decile of banks measured by total assets. We find that rents accruing to bankers are particularly strong in banks with a relatively large share of non-interest income and that for the largest banks a reduction of net interest margin is associated with an increase in bankers' rents. We find incorporating observable proxies for funding efficiency and presence in wholesale banking activities greatly reduces the pure size effect.

Suggested Citation

  • Anderson, Ronald W. & Jõeveer, Karin, 2012. "Bankers and bank investors: Reconsidering the economies of scale in banking," CEPR Discussion Papers 9146, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9146
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    References listed on IDEAS

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    1. Andrew Ellul & Vijay Yerramilli, 2010. "Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies," NBER Chapters,in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
    2. Pierre‐Philippe Combes & Gilles Duranton & Laurent Gobillon & Diego Puga & Sébastien Roux, 2012. "The Productivity Advantages of Large Cities: Distinguishing Agglomeration From Firm Selection," Econometrica, Econometric Society, vol. 80(6), pages 2543-2594, November.
    3. Robert DeYoung & W. Frame & Dennis Glennon & Peter Nigro, 2011. "The Information Revolution and Small Business Lending: The Missing Evidence," Journal of Financial Services Research, Springer;Western Finance Association, pages 19-33.
    4. Robert DeYoung & W. Frame & Dennis Glennon & Peter Nigro, 2011. "The Information Revolution and Small Business Lending: The Missing Evidence," Journal of Financial Services Research, Springer;Western Finance Association, pages 19-33.
    5. Luis Garicano & Esteban Rossi-Hansberg, 2006. "Organization and Inequality in a Knowledge Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1383-1435.
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    Cited by:

    1. Robert McKeown, 2017. "Where are the economies of scale in Canadian banking?," Working Papers 1380, Queen's University, Department of Economics.
    2. Robert McKeown, 2017. "Costs, size and returns to scale among Canadian and U.S. commercial banks," Working Papers 1382, Queen's University, Department of Economics.
    3. Robert McKeown, 2017. "An Overview of the Canadian Banking System: 1996 to 2015," Working Papers 1379, Queen's University, Department of Economics.

    More about this item

    Keywords

    agency; banking; compensation policy; scale economies;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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