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Do Big Banks Have Lower Operating Costs?
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Do Big Banks Have Lower Operating Costs?

Economic Policy Review. Special Issue: Large and Complex Banks

Anna Kovner, James Vickery and Lily Zhou
Federal Reserve Bank of New York, 2014
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Editorial Rating

8

Qualities

  • Innovative
  • Eye Opening
  • Background

Recommendation

In an era of systemically important financial institutions, some US banks are now “too big to fail” and perhaps “too big to jail.” The debate continues as to whether the largest banks enjoy unfair competitive and cost advantages relative to their smaller brethren, especially due to market perceptions of a government guarantee. Federal Reserve Bank of New York researchers Anna Kovner, James Vickery and Lily Zhou find that constraining bank size could result in unintended higher costs for the economy and consumers. getAbstract recommends this illuminating paper to financial institution executives, policy makers and analysts for its insights into the pluses and minuses of big banking.

Take-Aways

  • Because “too big to fail” banks could jeopardize financial stability, some commentators have suggested limiting the size of banks. But that may have unintended consequences.
  • Research shows that every additional $1 billion in bank assets translates to between $1 million and $2 million in reduced noninterest expenses annually.
  • As bank size increases by 10%, compensation costs fall by 0.735%, other noninterest expenses drop by 0.683%, and costs for fixed assets and premises decline by 0.478%.

About the Authors

Anna Kovner is a research officer at the Federal Reserve Bank of New York, where James Vickery is a senior economist and Lily Zhou is a senior research analyst.

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