Why Scale Is Overrated in Banking, in Two Charts
Bank M&A activity has been lackluster in most parts of the country. It will probably stay that way, since so many banks are too small for buyers to bother with.December 2
Lowering overhead (relative to assets) would be a powerful motivator for a bank to get big, fast. But the savings just aren't there.June 6
Are there economies of scale in banking?
To put it simply, no, at least from an expense standpoint, as demonstrated below.
The first chart ranks the 536 publicly traded U.S. banks and thrifts in increasing asset order (assets are as of the first quarter of 2014). The blue line shows the trend for assets, with the left y-axis providing the scale. The scale is logarithmic; each horizontal line denotes a tenfold increase in asset size. So the largest institution on the chart has $2.48 trillion in assets, nearly 13,000 times the assets of the smallest ($194 million).
The orange bars show overhead expense as a percentage of average assets for these institutions for 2013. The right y-axis applies to these bars. The average ratio for these institutions is 3.07%.
While there is considerable variance in this ratio across institutions, there is no discernible downward trend in it, even with a massive increase in asset size.
The second chart shows the lack of a trend in overhead expense more clearly. It contains the 113 largest institutions by assets, ranging from $5 billion to $2.48 trillion. The largest institution has 500 times the assets of the smallest. Still no trend.
What do these charts imply about the value of bigness? Post a comment below.
Harvard Winters, a former investment banker, writes research on banks.