Who said large banks don’t experience scale economies? Evidence from a risk-return-driven cost function

Joseph Hughes and Loretta Mester

No 13-13, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The Great Recession focused attention on large financial institutions and systemic risk. We investigate whether large size provides any cost advantages to the economy and, if so, whether these cost advantages are due to technological scale economies or too-big-to-fail subsidies. Estimating scale economies is made more complex by risk-taking. Better diversification resulting from larger scale generates scale economies but also incentives to take more risk. When this additional risk-taking adds to cost, it can obscure the underlying scale economies and engender misleading econometric estimates of them. Using data pre- and post-crisis, we estimate scale economies using two production models. The standard model ignores endogenous risk-taking and finds little evidence of scale economies. The model accounting for managerial risk preferences and endogenous risk-taking finds large scale economies, which are not driven by too-big-to-fail considerations. We evaluate the costs and competitive implications of breaking up the largest banks into smaller banks. ; This paper supersedes Federal Reserve Bank of Philadelphia Working Paper No. 11-27

Keywords: Banks and banking; Risk; Economies of scale (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... rs/2013/wp13-13R.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
Journal Article: Who said large banks don’t experience scale economies? Evidence from a risk-return-driven cost function (2013)
Working Paper: Who Said Large Banks Don't Experience Scale Economies? Evidence from a Risk-Return-Driven Cost Function (2013)
Working Paper: Who Said Large Banks Don't Experience Scale Economies? Evidence from a Risk-Return-Driven Cost Function (2011)
Working Paper: Who said large banks don't experience scale economies? Evidence from a risk-return-driven cost function (2011)
Working Paper: Who Said Large Banks Don't Experience Scale Economies? Evidence from a Risk-Return-Driven Cost Function (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:13-13

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().