Are Bigger Banks Better?
This report compares the relative performance of large and small bank holding companies in the 1990s in order to evaluate an important rationale behind the evolution of U.S. banking—that bigger is better. These results, however, suggest that large size is not enough to be successful in today's banking environment. Despite continuing consolidation and increased concentration, there are both highly successful and unprofitable bank holding companies across the size spectrum. The results also suggest that roughly 10 percent of costs can be attributed to cost inefficiency, while 30 to 40 percent of potential profits were foregone due to profit inefficiency. Finally, there is little dispersion with regard to cost inefficiency as the typical bank holding company does a better job controlling costs than maximizing profits. One plausible explanation is that information technology levels the playing field and creates similar cost structures for all institutions. These results imply that a large role remains for managers to improve operations and boost performance. (16 pages)