Dipartimento di Ingegneria informatica, automatica e gestionale

Continued consolidation of the U.S. banking industry and general increase in the

size of banks has prompted some policymakers to consider policies to discourage banks

from getting larger, including explicit caps on bank size. However, limits on the size of

banks could entail economic costs if they prevent banks from achieving economies of

scale. The extent of scale economies in banking remains unclear. This paper presents

new estimates of returns to scale for U.S. commercial banks based on nonparametric

estimation of bank cost, revenue and profit functions. We present estimates

for both 2006 and 2012 to compare the extent of scale economies in banking some four

years after the financial crisis and two years after enactment of the Dodd-Frank Act

with scale economies prior to the crisis. We find that most banks faced increasing

returns to scale in cost in both years, though results for the very largest banks in 2012

are somewhat sensitive to specication. Further, most banks faced decreasing returns

in revenue in both years, though nearly all banks could still increase revenue and profit

by becoming larger.