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Working Paper 2009-054A

"Are U.S. Banks too Large?"
by David C. Wheelock, and Paul Wilson

The substantial consolidation of the U.S. banking industry since the mid-1980s has brought a large increase in average (and median) bank size, which along with concerns about banks that are “too-big-to-fail,” has led many analysts to wonder whether banks are “too large.” This paper presents new estimates of ray-scale and expansion-path scale economies for U.S. banks based on nonparametric, local linear estimation of a model of bank costs. We employ a dimension-reduction technique to reduce estimation error, and bootstrap methods for inference. Our estimates indicate that as recently as 2006, most U.S. banks faced increasing returns to scale, suggesting that industry consolidation and increasing scale are likely to continue unless checked by government intervention.

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Category > Applied Econometrics
Category > Applied Microeconomics
Category > Banking
Author > David C. Wheelock
Research Papers and Publications: JEL Code > C12
Research Papers and Publications: JEL Code > C13
Research Papers and Publications: JEL Code > C14
Research Papers and Publications: JEL Code > L11
Research Papers and Publications: JEL Code > G21