Do Big Banks Have Lower Operating Costs?
27 Pages Posted: 4 Apr 2014 Last revised: 21 Jan 2015
Date Written: December 31, 2014
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: Suggested Citation