Do Big Banks Have Lower Operating Costs?

44 Pages Posted: 4 Dec 2017

See all articles by Anna Kovner

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: March 30, 2015

Abstract

We examine the relationship between bank holding company (BHC) size and components of non-interest 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, we find a robust negative relationship between size and normalized measures of NIE. The relationship is strongest for employee compensation expenses and components of “other” NIE, 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 U.S.$1 billion in assets reduces NIE by U.S.$1 million to U.S.$2 million per year, relative to a base case where operating cost ratios are unrelated to size.

Suggested Citation

Kovner, Anna and Vickery, James Ian and Zhou, Lily, Do Big Banks Have Lower Operating Costs? (March 30, 2015). Journal of Financial Perspectives, Vol. 3, No. 1, 2015. Available at SSRN: https://ssrn.com/abstract=3080445

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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