Bank Scale Economies, Mergers, Concentration, and Efficiency : The U.S. Experience

This paper summarizes research on U.S. bank cost and profit functions, and their policy implications. The purpose is to provide a backdrop for the likely implications of European financial integration. Scale and scope economies in banking are not found to be important, except for the smallest banks. X-efficiency, or managerial ability to control costs, is of much greater magnitude -- at least 20% of banking costs. Mergers have no significant predictable effect on efficiency -- some mergers raise efficiency but others lower it. Market concentration results in slightly less favorable prices for customers, but has little effect on profitability