Thrift Scale Economies: An Alternative Approach

By McNulty, James E.; Verbrugge, James A. et al. | Quarterly Journal of Business and Economics, Summer 1995 | Go to article overview

Thrift Scale Economies: An Alternative Approach


McNulty, James E., Verbrugge, James A., Blackwell, David W., Quarterly Journal of Business and Economics


INTRODUCTION

The trend toward consolidation in the thrift industry received a substantial boost from the passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in August 1989. FIRREA came after ten years of increased financial pressure on the industry as a result of earlier moves toward deregulation. FIRREA imposed higher capital requirements and higher deposit insurance premiums on thrifts while it allowed less liberal asset powers. The question of how this consolidation will affect operating efficiency is a subject of considerable interest.

The two principal recent studies of thrift scale economies are LeCompte and Smith (1990) and Mester (1987). While the findings differ somewhat depending on model specification and sample period, the basic conclusion from both studies is that, for the early 1980s, returns to scale are approximately constant.(1) Both studies employ a multiproduct approach, which has been used increasingly in the scale economies literature over the past several years. This approach can result in severe multicollinearity, however, when applied to a small sample. The Mester (1987) study produces a negative estimate of marginal cost, which, according to Berger, Hanweck, and Humphrey (1987, p. 509), "theoretically invalidates measures derived from these cost functions." In addition, in a major review of bank cost studies, Gilbert (1984) has written that because of small, geographically restricted samples, existing studies do not provide evidence that is relevant for many policy issues. This article argues that there are advantages to a large sample, single product study as a check on the conclusions of smaller sample, multiproduct studies of scale economies. We apply such an approach to the thrift industry using data for the period 1986 to 1989.(2) Another purpose of this paper is to provide estimates of scale economies for several specific size classes, something that is not always done in other studies.(3) We briefly summarize recent research on scale economies at commercial banks and thrifts and then discuss single product and multiproduct cost studies. Our data and estimation method and empirical results follow.

FINANCIAL INSTITUTION SCALE ECONOMIES LITERATURE REVIEW

Evidence on scale economies in the financial services industry is mixed. Early banking studies summarized in Benston (1972) conclude that scale economies are present throughout a wide range of size classes. Some later studies of commercial banking cost structures (i.e., Benston, Hanweck, and Humphrey, 1982; Benston, Berger, Hanweck, and Humphrey, 1983; and Gilligan, Smirlock, and Marshall, 1984) conclude that scale economies are exhausted quickly beyond a relatively small asset size and that cost curves are either flat or upward sloping at higher output levels. This literature is summarized in Gilbert (1984). In contrast, Murray and White (1983) find evidence of scale economies in credit unions.

Studies of savings institutions similarly have yielded conflicting results. Goldstein, McNulty, and Verbrugge (1987) and McNulty (1982, 1983) report evidence of scale economies, while LeCompte and Smith (1990) and Mester (1987) suggest approximately constant returns to scale in most model specifications. The Mester (1987) study uses a sample of California institutions in which over one-half of the firms are state-chartered stock firms that have engaged in diversified activities for some time. The study by LeCompte and Smith (1990) uses a sample of 431 institutions from the southwestern portion of the United States for two years, 1978 and 1983. In contrast, the study by Goldstein, McNulty, and Verbrugge (1987) is based on four years of pre-1980 data for all FSLIC-insured institutions. Thus, the latter results reflect the effects of more specialized activities (primarily residential lending) in a highly regulated era. In addition, this study excludes interest cost from the definition of total cost.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Thrift Scale Economies: An Alternative Approach
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.