Economic Cost, Scale Efficiency, and Competitive Viability in Banking

TLDR

This paper addresses the competitive viability of banks of different scales and scopes and its implications for the evolving banking industry structure. The study aims to evaluate bank efficiency by incorporating both production and opportunity costs, a first in empirical analysis. The authors empirically assess bank efficiency using both production and opportunity cost measures across banks of varying sizes. The analysis finds no consistent evidence that banks can improve production or economic efficiency by expanding beyond $2 billion in total assets, suggesting smaller, less diversified banks remain competitively viable. © 1996 Ohio State University Press.

Abstract

This paper addresses the issue of the competitive viability of banks of different scales and scopes of operation and the implications that this may have for the evolving structure of the banking and financial services industry. Unlike previous papers, this paper is the first to include both production and opportunity costs in an empirical evaluation of bank efficiency. No consistent evidence is reported to suggest that banking organizations can achieve further gains in either production or economic efficiency by expanding beyond $2 billion dollars of total assets. Thus it is likely that smaller, less diversified banking organizations will remain competitively viable. Copyright 1996 by Ohio State University Press.