Economies of Scale Revisited: Evidence from Italian Banks

Abstract

This paper provides new estimates of cost scale economies for Italian banks, based on a model of bank production that takes into account a comprehensive definition of output including different categories of loans, deposits, off-balance sheet items, payment services, and brokerage and asset management activities. The output definition is more in line with the current business model of banks than previous studies since it explicitly accounts for transaction banking and IT capital. We find returns to scale in operating costs, especially for small and medium-sized institutions. For the largest institutions there is on average no statistically significant evidence of returns from scale on the cost side; however, banks falling into this latter category are quite heterogeneous in size and business model. A more extensive adoption of digital technologies in the future could expand the size range over which positive returns to scale are achievable. These results are robust to alternative input and output specifications and functional forms. An important caveat to this conclusion is that we focus solely on operating costs.

Keywords: bank costs, scale economies, cost efficiency

JEL Classification: D24, G21, L23