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Do Big Banks Have Lower Operating Costs?
Report

Do Big Banks Have Lower Operating Costs?

Economic Policy Review. Special Issue: Large and Complex Banks


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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.

Summary

Judging from the 2008 financial crisis, US banks deemed “too big to fail” could jeopardize the stability of the financial system. Some commentators have suggested limiting the size of banks by capping their assets relative to GDP or by imposing incremental fees on assets above a given threshold. While these proposals may have merit in reducing systemic risk, they might also involve costs to the economy.

A better understanding of the relationship between banks’ size and cost efficiency emerges from studying the regulatory filings...

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.