The Evolution of Scale Economies in U.S. Banking

Continued consolidation of the U.S. banking industry and general increase in the size of banks has prompted some policymakers to consider policies to discourage banks from getting larger, including explicit caps on bank size.  However, limits on the size of banks could entail economic costs if they prevent banks from achieving economies of scale.  The extent of scale economies in banking remains unclear.  This paper presents new estimates of returns to scale for U.S. banks based on nonparametric, local-linear estimation of bank costs, revenue and profit functions.  We present estimates for both 2006 and 2014 to compare the extent of scale economies in banking some six years after the financial crisis and four years after enactment of the Dodd-Frank Act with scale economies prior to the crisis.  We find that a high percentage of banks faced increasing returns to scale in cost in both years, including all of the 10 largest bank holding companies.  Revenue and profit economies vary more across banks, though in both years nearly all banks could increase revenue and profit by becoming larger.