Resolving the Scale Efficiency Puzzle in Banking

Posted: 26 Oct 2008

See all articles by Patrick McAllister

Patrick McAllister

Lincoln Financial Group

Douglas A. McManus

Federal Home Loan Mortgage Corporation (FHLMC)

Date Written: October 25, 2008

Abstract

Most previous empirical research on scale efficiency in banking has found increasing returns to scale only among relatively small banks, and decreasing returns to scale among larger banks. The present study shows that these results were biased by problems in the statistical techniques used and by the fact that the models ignored an important input required for the intermediation process, financial capital. When the econometric problems are solved and the relationship among size, diversification, and risk is properly accounted for, there is strong evidence of increasing returns to scale for banks up to about $500 million in total assets and approximately constant returns for larger banks.

Keywords: returns to scale, finance, banking

JEL Classification: G21

Suggested Citation

McAllister, Patrick and McManus, Douglas A., Resolving the Scale Efficiency Puzzle in Banking (October 25, 2008). Journal of Banking and Finance, Vol. 17, Nos. 2-3, 1993, Available at SSRN: https://ssrn.com/abstract=1289829

Patrick McAllister

Lincoln Financial Group ( email )

Philadelphia, PA
United States

Douglas A. McManus (Contact Author)

Federal Home Loan Mortgage Corporation (FHLMC) ( email )

8200 Jones Branch Road
McLean, VA 22101
United States
703-903-2953 (Phone)

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