Economies or diseconomies of scope in the EU banking industry?

Abstract

Banks’ business models are assumed to affect efficiency, as documented in the banking supervisory priorities of the European Union (EU) for 2016–2018 and the 2014 structural reform proposal for the EU banking sector. We investigate evidence of economies and diseconomies of scope for the EU. We find cost economies of scope and revenue diseconomies of scope, resulting in profit diseconomies of scope. Separating commercial from investment activities generates economic inefficiencies on costs but efficiencies on revenues and profits. Economies of scope are affected by bank size, liquidity, competition in the banking industry, and the European sovereign debt crisis.

Returns to scale in cost, revenue, and profit for European banks: New results from nonparametric local linear methods

“…As the nondeposit liabilities only account for a very small proportion (less than 8% for a median bank) in our data set, we do not include nondeposit liabilities.We thank an anonymous referee for mentioning this.9 As the number of employee is not available for many banks in the sample, followingBeccalli et al (2015) andBeccalli and Rossi (2020), we use the ratio of expenses on labor over the total assets as a proxy for the labor price.…”