Returns to scale, spillovers and persistence: A network perspective of U.S. bank size

Abstract

The methods for ray-scale economies (RSE) and expansion-path scale economies (EPSE) are extended to the dynamic spatial setting. We apply these methods to large U.S. banks using dynamic spatial cost and revenue models and key findings include the following. First, accounting for spillovers and dynamics strengthens the case for EPSE over RSE. Second, own, spillover and total EPSE are very persistent in future periods. Third, the EPSE suggest that an appropriate regulatory size cap would shift one systemically important bank to its contemporaneous optimal scale. However, the EPSE suggest that this would be a sub-optimal dynamic scale in future periods.