Working Paper: CEPR ID: DP9146
Authors: Ronald W. Anderson; Karin Jeveer
Abstract: We study economies of scale in banking by viewing banks as combinations of financial and human capital that create rents which accrue to investors and bankers. Applying this approach to annual data of US bank holding companies since 1990, we find much stronger evidence of economies of scale in returns to bankers as compared to returns to investors. The scale economies appear to be particularly strong in the top size decile of banks measured by total assets. We find that rents accruing to bankers are particularly strong in banks with a relatively large share of non-interest income and that for the largest banks a reduction of net interest margin is associated with an increase in bankers' rents. We find incorporating observable proxies for funding efficiency and presence in wholesale banking activities greatly reduces the pure size effect.
Keywords: agency; banking; compensation; policy; scale economies
JEL Codes: G20; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank size (G21) | Returns to bankers (G21) |
| Bank size (G21) | Returns to investors (G12) |
| Reduction in net interest margin (G21) | Increase in bankers' rents (G21) |
| Funding efficiency and wholesale banking activities (G21) | Pure size effect (L25) |
| Bank size (G21) | Total rents accruing to bankers and investors (G21) |