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In Finance, Size Matters

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  • Mr. Jong-Kun Lee
  • Mr. Biaggio Bossone

Abstract

This study investigates the relationship between production efficiency in financial intermediation and financial system size. The study predicts and tests for the existence of "systemic scale economies" (SSEs), whereby value-maximizing intermediaries operating in large systems are expected to have lower production costs and lower costs of risk absorption and reputation signaling than intermediaries operating in small systems. The study investigates different channels through which the SSEs work their effects through the intermediaries and estimates such effects using a large banking data panel. The study shows strongly supporting evidence in favor of SSEs. It also finds that the institutional environment, the risk environment, and market concentration affect significantly the production efficiency of financial intermediaries.

Suggested Citation

  • Mr. Jong-Kun Lee & Mr. Biaggio Bossone, 2002. "In Finance, Size Matters," IMF Working Papers 2002/113, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2002/113
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    3. M. Kabir Hassan & Benito Sanchez, 2007. "Efficiency Determinants and Dynamic Efficiency Changes in Latin American Banking Industries," NFI Working Papers 2007-WP-32, Indiana State University, Scott College of Business, Networks Financial Institute.

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    Keywords

    WP; financial market; equity capital; production efficiency; shadow price;
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