Bigger is better, at least when it comes to bank efficiency. A study by Federal Reserve Board economist Allen N. Berger and Federal Reserve Bank of Philadelphia economist Loretta J. Mester finds that the optimal size for a bank is around $25 billion of assets.

Banks with less in assets are not taking advantage of economies of scale, the study found, and those with more are too large to operate at top efficiency.

The study, which relied upon regression analyses, looked at data from 1990 to 1995. Previous studies, based on data from the 1980s, pegged the optimal asset size of a bank at less than $10 billion.

The economists identify three possible reasons for the change. First, they say, lower interest rates in the 1990s have disproportionately benefited large banks, which purchase more funds on the open market. Also, they say, large banks are adopting new technology and are taking advantage of regulatory changes such as interstate banking more quickly than smaller institutions.

For a copy of Wharton Financial Institutions Center working paper ##97- 04, call 215-573-5838.

Lifting geographic restrictions on branching brings banking services to rural areas. Jeffery W. Gunther, a senior economist and policy adviser at the Federal Reserve Bank of Dallas, uses a regression analysis to conclude that rural areas in states that liberalized branching restrictions benefited more than those in states that tried to restrict branching. "The liberalization of geographic banking restrictions has lived up to its promise of enhancing service accessibility in rural areas," he writes.

For a copy of "Geographic Liberalization and the Accessibility of Banking Services in Rural Areas," call 214-922-5254.

Aggressive bank lending is not the only reason for the rise in credit card and consumer loan chargeoffs. Two researchers at the Federal Reserve Bank of New York find that they can predict the rise in bad debt by looking at consumer demand for credit.

Using a regression analysis, they find that chargeoffs rise whenever consumer wealth increases and the percentage of the population entering peak borrowing years goes up. These two factors cause borrowers to take on more debt than they can handle, write Donald P. Morgan, a Federal Reserve Bank of New York economist, and Ian Toll, a former financial analyst at the New York Fed. The result: more consumers default on their loans.

"This convergence has fueled the demand for credit and has driven up debt burdens, making borrowers riskier," they said. "As a result, bad debt is on the rise."

Banks could boost deposits with financial planning workshops, focus groups, one-on-one financial counseling, interactive software, videos, and brochures that give customers a better idea of how much money they need to save for their retirement.

People who complete financial education programs increase their savings on average 1.6%, giving them about $2,500 more per year to spend in retirement than comparable workers who don't participate, write Stanford University economist B. Douglas Bernheim and Cornerstone Research associate Daniel Garrett.

For a copy of National Bureau of Economic Research Working Paper ##5567, call 617-868-3900.

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