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Are U.S. banks too large?

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  • David C. Wheelock
  • Paul W. Wilson

Abstract

The number of commercial banks in the United States has fallen by more than 50 percent since 1984. This consolidation of the U.S. banking industry and the accompanying large increase in average (and median) bank size have prompted concerns about the effects of consolidation and increasing bank size on market competition and on the number of banks that regulators deem “too big to fail.” Agency problems and perverse incentives created by government policies are often cited as reasons why many banks of pursued acquisitions and growth, though bankers often point to economies of scale. This paper presents new estimates of ray-scale and expansion-path scale economies for U.S. banks based on nonparametric local-linear estimation of a model of bank costs. Unlike prior studies that use models with restrictive parametric assumptions or limited samples, our methodology is fully nonparametric and we estimate returns to scale for all U.S. banks over the period 1984-2006. Our estimates indicate that as recently as 2006, most U.S. banks faced increasing returns to scale, suggesting that scale economies are a plausible (but not necessarily only) reason for the growth in average bank size and that the tendency toward increasing scale is likely to continue unless checked by government intervention.

Suggested Citation

  • David C. Wheelock & Paul W. Wilson, 2009. "Are U.S. banks too large?," Working Papers 2009-054, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2009-054
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    References listed on IDEAS

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    Cited by:

    1. Craig P. Aubuchon & David C. Wheelock, 2010. "The geographic distribution and characteristics of U.S. bank failures, 2007-2010: do bank failures still reflect local economic conditions?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 395-415.
    2. Nicolas Véron & Morris Goldstein, 2011. "Too big to fail: the transatlantic debate," Working Papers 495, Bruegel.
    3. Hou, Xiaohui & Wang, Qing & Li, Cheng, 2015. "Role of off-balance sheet operations on bank scale economies: Evidence from China's banking sector," Emerging Markets Review, Elsevier, vol. 22(C), pages 140-153.
    4. Sameh Charfeddine Karray & Jamel eddine Chichti, 2013. "Bank Size and Efficiency in Developing Countries: Intermediation Approach versus Value Added Approach and Impact of Non-Traditional Activities," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 3(5), pages 593-613, May.

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    Keywords

    Banks and banking ; Economies of scale ; Bank failures;

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