Do Big Banks Have Lower Operating Costs?

27 Pages Posted: 4 Apr 2014 Last revised: 21 Jan 2015

Anna Kovner

Federal Reserve Bank of New York

James I. Vickery

Federal Reserve Bank of New York

Lily Zhou

Federal Reserve Bank of New York; Sciences Po, Students

Multiple version iconThere are 2 versions of this paper

Date Written: December 31, 2014

Abstract

This study examines the relationship between bank holding company (BHC) size and components of noninterest expense (NIE), in order to shed light on the sources of scale economies in banking. Drawing on detailed expense information provided by U.S. banking firms in the memoranda of their regulatory filings, the authors find a robust negative relationship between size and normalized measures of NIE. The relationship is strongest for employee compensation expenses and components of “other” noninterest expense such as information technology and corporate overhead expenses. In addition, the authors find no evidence that the inverse relationship between banking firm size and NIE ratios disappears above a given size threshold. In dollar terms, their estimates imply that for a BHC of mean size, an additional $1 billion in assets reduces noninterest expense by $1 million to $2 million per year, relative to a base case where operating cost ratios are unrelated to size.

Keywords: banking, economies of scale, too-big-to-fail

JEL Classification: G20, G21

Suggested Citation

Kovner, Anna and Vickery, James I. and Zhou, Lily, Do Big Banks Have Lower Operating Costs? (December 31, 2014). Economic Policy Review, Vol. 20, No. 2, pp. 1-27.. Available at SSRN: https://ssrn.com/abstract=2419659

Anna Kovner (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

James Ian Vickery

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Lily Zhou

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Sciences Po, Students ( email )

28 Rue des Saint-Peres
Paris, Paris 75006
France

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