Bank Scale Economies, Mergers, Concentration, and Efficiency: The U.S. Experience

There have been numerous econometric studies of bank scale and scope economies, efficiency, mergers, and market structure and performance in U.S. banking. According to the authors, these studies have come to the following conclusions: Scale: For the very smallest banks, there are scale economies that allow average costs to fall with increases in bank size, but they account for less than 5% of costs. For larger banks, constant average costs or slight diseconomies of scale prevail. Scope: There are at most relatively minor scope economies that reduce cost by 5% or less when multiple products are produced jointly. Revenues appear to be unaffected by product mix. X-Efficiency: Managerial ability to control costs is much more important than scale and scope. Banks may have costs 20% higher than the industry minimum for the same scale and product mix. Mergers: On average, mergers had no significant, predictable effect on cost and efficiency. Market Structure and Bank Performance: Greater local market concentration results in slightly lower deposit rates for small borrowers and slightly higher loan rates for small borrowers. Differences in local market concentration have virtually no effect on bank profitability. The implications of the U.S. experience for Europe are that cross-border mergers and acquisitions by banks in Europe are not like to lower costs by any significant amount. What cost improvements there are will most likely be generated by improvement in X-efficiency, or better management of resources, rather than through improved scale or scope economies. There may be more potential for efficiency gains from mergers on the revenue side than on the cost side, but these have not yet been thoroughly explored. To the degree that cross-border expansions increase local market competition, they may also yield the social benefit of slightly more favorable prices for the consumer of financial services.