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Fixed Costs in the U.S. Banking System

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Abstract

Fixed costs account for an increasing share of operating expenses in the U.S. banking system. From 1995 to 2026, estimated fixed costs rose from 37 percent to 62 percent as a share of total noninterest expense. Over the same period, estimated marginal and average operating costs declined, loan spreads and net interest margins fell, and estimated loan markups increased by 21 percentage points. These trends are pervasive across banks but are most pronounced among large banks. We develop a model of bank industry dynamics with endogenous fixed costs to rationalize these long-run trends and examine pro-competitive effects. While competition increases credit supply, it decreases lending efficiency and increases bank risk-taking.

Suggested Citation

  • Thomas Désiré & Jordan Pandolfo, 2026. "Fixed Costs in the U.S. Banking System," Research Working Paper RWP 26-12, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:103727
    DOI: 10.18651/RWP2026-12
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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