Scale effects in the U.S. banking sector: A paradox?
Why do both small banks manage to survive in the U.S. banking market despite significant cost advantages for larger banks? More specifically, how are scale advantages related to bank size, market power and productivity?
Although big banks (especially too-big-to-fail banks) have been given negative press since the start of the global financial crisis in 2008, the literature has shown that big banks benefit from certain scale advantages. Paradoxically, U.S. banks have demonstrated long-term economic viability over a range of scales on the order of 300,000:1 in terms of total assets. This market survival evidence suggests that scale effects must be limited despite recent evidence, or that small banks manage to compensate in some way for their inefficient scale. This project will analyze why U.S. banks of different scale survive in the same market despite the presence of scale economies by assessing the relation between scale effects, bank size, productivity and market power in the U.S. banking sector.
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