Bankers and Bank Investors: Reconsidering the Economies of Scale in Banking

41 Pages Posted: 28 Sep 2012

See all articles by Ronald W. Anderson

Ronald W. Anderson

London School of Economics & Political Science - Department of Finance; Centre for Economic Policy Research (CEPR); Sun Yat-sen University (SYSU) - Xinhua College

Karin Jõeveer

Tallinn University of Technology (TUT)

Date Written: September 2012

Abstract

We study economies of scale in banking by viewing banks as combinations of financial and human capital that create rents which accrue to investors and bankers. Applying this approach to annual data of US bank holding companies since 1990, we find much stronger evidence of economies of scale in returns to bankers as compared to returns to investors. The scale economies appear to be particularly strong in the top size decile of banks measured by total assets. We find that rents accruing to bankers are particularly strong in banks with a relatively large share of non-interest income and that for the largest banks a reduction of net interest margin is associated with an increase in bankers' rents. We find incorporating observable proxies for funding efficiency and presence in wholesale banking activities greatly reduces the pure size effect.

Keywords: agency, banking, compensation policy, scale economies

JEL Classification: G20, G21

Suggested Citation

Anderson, Ronald W. and Jõeveer, Karin, Bankers and Bank Investors: Reconsidering the Economies of Scale in Banking (September 2012). CEPR Discussion Paper No. DP9146, Available at SSRN: https://ssrn.com/abstract=2153587

Ronald W. Anderson (Contact Author)

London School of Economics & Political Science - Department of Finance ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 6204 (Phone)
+44 20 7955 7420 (Fax)

HOME PAGE: http://personal.lse.ac.uk/ANDERSOR/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Sun Yat-sen University (SYSU) - Xinhua College ( email )

China

Karin Jõeveer

Tallinn University of Technology (TUT) ( email )

Ehitajate tee 5
Tallinn, 12618
Estonia

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