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Costs, size and returns to scale among Canadian and U.S. commercial banks

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  • Robert McKeown

    () (Queen's University)

Abstract

I compare returns to scale in the U.S. and Canadian banking system from 1996 to 2015. I estimate a parametric trans-log cost function and, for robustness, an inputoriented distance function. I do this in a way that is commensurate with the limitations of these models. Among the ten largest commercial banks, I find evidence for small but statistically significant increasing returns to scale (RTS). This reflects the descriptive data that offers little evidence for extremely large scale economies. Comparatively, I find constant RTS for the Canadian banks. They paid fewer costs per asset, particularly lower labour costs and legal penalties. Comparing income statement items, I find that, despite higher firm concentration in Canada, the U.S. banks had higher net interest margin rate, paid a lower rate of interest on funds, and had higher credit losses per financial assets. If the U.S. banking system is more competitive, this questions whether an increase in bank competition will create a net positive outcome for society.

Suggested Citation

  • 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.
  • Handle: RePEc:qed:wpaper:1382
    as

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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1382.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bank; Commercial Banks; Financial Intermediaries; Retail Bank; Canada; Canadian;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L89 - Industrial Organization - - Industry Studies: Services - - - Other

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