Comment: Despite Banking Cult of Bigness, Few Benefits of Scale Are Realized

By Kamra, Atul; Davis, Peter C. | American Banker, July 7, 1998 | Go to article overview

Comment: Despite Banking Cult of Bigness, Few Benefits of Scale Are Realized


Kamra, Atul, Davis, Peter C., American Banker


The megamergers that would create Citigroup and the new BankAmerica raise questions about the benefits of size.

After all, consumers long ago thumbed their noses at one-stop shopping in banking. And bigness in banking has not historically yielded the expected economies of scale or scope.

This industry consolidation, therefore, raises several fundamental questions:

Is big better?

Can big be managed?

Are smaller banks marginalized by this activity?

Despite its dramatic consolidation, the U.S. banking industry has not yet realized the benefits of scale. Efficiency ratios have shown marked improvement during this consolidation, but the improvement has not benefited the top banks more than others.

The benefits of scale and scope have been observed in individual businesses-for example, in securities processing and the credit card business-but these relationships have still not materialized companywide. Indeed, little evidence of the benefits of size exists despite widely held theories about economies of scale and scope such as:

Size is necessary to overcome ever-larger spending requirements for branding, distribution, and technology.

Benefits will emerge from cross-selling more products.

Simple operating leverage can result from spreading corporate overhead across a larger operating and revenue base.

To date, the benefits of size have been undone by the complexity of running multiline businesses. Product costs and specialization have significantly increased as a portion of banks' total expenses, but the technology and sales management practices to fuel greater cross-selling have not materialized.

The primary value of bigness depends on the bank's position with respect to the scale requirements for each business in which it competes. They drive size at the business level, not the company level.

A second size hurdle will develop if the newly created financial groups develop technology and/or branding strategies that benefit the entire company. …

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