External economies in banking

Abstract

Purpose

The purpose of this paper is to provide the first empirical study of external economies (agglomeration economies) in the banking industry.

Design/methodology/approach

The author extends a standard specification of banking costs to control for community and market characteristics.

Findings

Banks' costs are a decreasing function of the number of rival banks and an increasing function of market population. Estimated magnitudes of these effects, modest at the bank level, are large in aggregate. Multimarket operation of rival banks is also important.

Originality/value

These findings suggest a previously unrecognized cost‐side benefit of structure‐based antitrust policies, and have additional implications for public policy toward banking structure, as well as calling for a re‐interpretation of previous studies of scale economies, cost efficiency, and price‐cost margins in banking.

Citation

Shaffer, S. (2012), "External economies in banking", Journal of Financial Economic Policy, Vol. 4 No. 4, pp. 354-365. https://doi.org/10.1108/17576381211279316