Do Large Banks Have Lower Costs? New Estimates of Returns to Scale for U.S. Banks

Authors


  • This research was conducted while Wilson was a visiting scholar in the Research Department of the Federal Reserve Bank of St. Louis. We thank the Cyber Infrastructure Technology Integration group at Clemson University for operating the Palmetto cluster used for our computations; we are especially grateful to Barr von Oehsen for technical support and advice. We thank Craig Aubuchon, Heidi Beyer, and David Lopez for research assistance, and we thank the editor, Bob DeYoung, and an anonymous referee for comments on a previous version of this paper. The views expressed in this paper do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Abstract

This paper presents new, fully nonparametric estimates of ray-scale and expansion-path scale economies for U.S. banks based on a model of bank costs. Unlike prior studies that use models with restrictive parametric assumptions or limited samples, our methodology uses local polynomial estimators and data on 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.

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