Academic journal article ABA Banking Journal

What Hath Mergers Wrought?

Academic journal article ABA Banking Journal

What Hath Mergers Wrought?

Article excerpt

At first glance, commercial banking seems an industry ripe for exploitation of the economies of scale. So goes the theory. But, when you examine the numbers in U.S. banking, is bigger really better? The Conference Board, a nonprofit business research organization, recently analyzed the industry's performance over the 1990s as the advent of interstate banking and branching, and other, related factors shrunk the number of institutions and concentrated banking assets into fewer hands. According to the organization's analysis, performed by economist Kevin Stiroh, the answer is a resounding "no"--with a conditional "but" thrown in.

Any way you slice it

The Conference Board study compared the relative performance of large and small bank holding companies, looking at average costs, profits, cost efficiency, and profit efficiency. Its overall findings:

* Large banks and bank holding companies don't have a fundamental performance advantage over smaller ones. In fact, the study noted, during most of the 1990s the ten largest banks showed the lowest levels of profitability. In 1997, for instance, the study noted, the ten largest institutions had an average return on assets of 0.98%; the smallest institution came in with an ROA of 1.31%.

Further, "it appears that further consolidation can be helpful for medium-size institutions, but it is not clear that mega-mergers can expect substantial gains from economies of scale," the study said. …

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