External economies in banking

What is it about?

Many studies have explored whether "bigger is cheaper" in banking, a vital question for bank mergers, concentration, and economic welfare. However, previous studies have overlooked the possibility that community or market factors may influence bank costs along with the usual bank-specific factors. Other studies have shown such effects to be important in manufacturing. This article applies that insight to banking data and finds that bank costs tend to be lower when many rival banks exist, but higher in more populous communities.

Featured Image

Why is it important?

Structure-based antitrust policies promote multiple rivals and unconcentrated market structures based on a belief that consumers benefit from lower prices when many firms (e.g., many banks) compete. The new findings here reinforce that conclusion from a different mechanism, based on cost effects rather than purely behavioral effects. The findings also shed new light on the viability of community banks, broader effects of too-big-to fail, and similar timely issues.

Perspectives