The Cost Consequences of Breaking up Large Banks: Do Large Banks Enjoy Technological Cost Advantages?

Abstract

Proposals to break up the largest banks seek to reduce the systemic risk they impose on the economy. However, if these banks experience scale economies that reduce the average cost of their financial products and services, breaking them into smaller institutions might reduce their ability to compete in global markets and provide them with incentives to evade break up and operate outside the regulated financial system -with the potential for new sources of systemic risk. Textbooks assert that large scale is associated with such cost economies, but the evidence for these economies is difficult to obtain. Is such evidence illusive or elusive? This paper explores some of the published evidence and the reasons why it is elusive, not illusive.