Obelix vs. Asterix: Size of US commercial banks and its regulatory challenge

Abstract

Big banks pose substantial costs to society in the form of increased systemic risk and government bailouts during crises. Should regulations limit the size of banks? To answer this question, regulators need to assess the potential costs of such regulations. If big banks enjoy substantial scale economies, that is, lower average costs as bank size increases, size limit regulations may be inefficient and may reduce social welfare. However, the literature offers conflicting results regarding the existence of economies of scale for the biggest U.S. banks. We contribute to this literature using a novel approach to estimate nonparametric measures of scale economies and total factor productivity (TFP) growth. For U.S. commercial banks, we find that around 73% of the top one hundred banks, 98% of medium and small banks, and seven of the top ten biggest banks by asset size exhibit substantial economies of scale. In addition, scale economies contribute positively and significantly to their TFP growth. The existence of substantial scale economies at commercial banks raises an important challenge for regulators to pursue size limit regulations.Keywords bank regulation · economies of scale · returns to scale · nonparametric methods JEL Classification L51 · G21 · G28 · D24 · L25 · C14

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