Abstract

The Size of Banks and Efficiency

The discussion about concentration in the European banking sector is largely being conducted in qualitative terms without attempting empirical testing. University studies of economies of scale, economies of scope or mere analyses of the consequences of bank mergers already completed in respect of efficiency, growth, market shares, earnings etc. do still not exist to any noticeable extent.

But a least certain empirical evidence of the size of banks and efficiency exists abroad, especially in English-speaking countries, although such evidence cannot simply be adopted and applied in the German-speaking area because financial institutions are different. The question of economies of scale and economies of scope has been investigated mainly in the USA on the basis of multi-product production functions as well as of returns-to-scale functions. Except at the level of very small banks, no convincing evidence has been found suggesting noticeable returns to scale and just modest evidence suggesting advantages of scope. Individual – methodically rather simple – test runs on the basis of profit functions for European banks do not contradict these mostly American results. The few ex-post analyes of bank mergers which showed but a few positive and even a number of negative implications for the goodwill of companies point to the same direction or relatively low returns to scale in the case of banks as well.

Euphoria about concentration suggesting that big banks and universal financing groups would be the only ones to survive in future can thus in no way be substantiated by the evidence obtained on the basis of the empirical studies made todate. On the other hand, the question arises to what extent small and big banks can be compared at all, whether they do not perform different functions and do thus not compete with one another, but find their tasks to be complementary in nature. Empirical studies on this subject are even rarer than evidence concerning returns to scale.