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

  • Ronald W. Anderson
  • Karin Joeveer

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.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp712.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp712.

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Date of creation: Sep 2012
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Handle: RePEc:fmg:fmgdps:dp712
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. Combes, Pierre-Philippe & Duranton, Gilles & Gobillon, Laurent & Puga, Diego & Roux, Sébastien, 2009. "The productivity advantages of large cities: Distinguishing agglomeration from firm selection," CEPR Discussion Papers 7191, C.E.P.R. Discussion Papers.
  2. Andrew Ellul & Vijay Yerramilli, 2010. "Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies," FMG Discussion Papers dp646, Financial Markets Group.
  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, vol. 39(1), pages 19-33, April.
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