Are European Banks Too Big? Evidence on Economies of Scale

31 Pages Posted: 7 Aug 2013

See all articles by Mario Anolli

Mario Anolli

Università Cattolica del S. Cuore

Elena Beccalli

Catholic University of the Sacred Heart of Milan - Institute of Economy and Finance

Giuliana Borello

University of Verona - Department of Economics

Date Written: August 6, 2013

Abstract

This paper investigates the level of economies of scale, as well as their determinants, for 103 European listed banks over the period 2000-2011 by employing a Stochastic Frontier Approach. The results reveal that economies of scale are widespread and move together for all size classes, although small and medium-sized banks experience the lowest economies of scale and even diseconomies of scale in some of the years under analysis. At country level, the smallest financial systems (Iceland, Belgium and Finland) and the countries most affected by the financial crisis (Ireland, Iceland, Belgium, Portugal and Spain) experience the lowest economies of scale (if not even diseconomies of scale) probably due to the small/reduced use of their production capacity. With regard to the effects on economies of scale of risk-taking, diversification in the business model and profitability, higher economies of scale are documented for banks more oriented towards investment banking (in all periods), banks with a higher liquidity but only up to a liquidity ratio of about 5.3 percent (convex curve during the crisis only), banks with less Tier 1 (concave, although almost flat, curve during the crisis only), and banks contributing less to systemic risk (during the crisis only). The main policy implication concerns the too big to fail regulation, and especially the fact that the break-up hypothesis seems not to find support from our evidence.

Keywords: Bank, Economies of scale, Regulation, EU

JEL Classification: G21

Suggested Citation

Anolli, Mario and Beccalli, Elena and Borello, Giuliana, Are European Banks Too Big? Evidence on Economies of Scale (August 6, 2013). Available at SSRN: https://ssrn.com/abstract=2306771 or http://dx.doi.org/10.2139/ssrn.2306771

Mario Anolli

Università Cattolica del S. Cuore ( email )

via Necchi 5
20123 Milano
Italy
+390272342465 (Phone)

Elena Beccalli

Catholic University of the Sacred Heart of Milan - Institute of Economy and Finance ( email )

Via Necchi 5
20123 Milano
Italy

Giuliana Borello (Contact Author)

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
Verona, 37129
Italy

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