Obelix vs. Asterix : size of US commercial banks and its regulatory challenge

Big banks pose substantial costs to society in the form of increased systemic risk and government bailouts during crises. So the question is: Should regulators limit the size of banks? To answer this question, regulators need to assess the potential costs of such regulations. If big banks enjoy substantial scale economies (i.e., average costs get lower as bank size increases), limiting the size of banks through regulations may be inefficient and likely to reduce social welfare. However, the literature offers conflicting results regarding the existence of economies of scale for the biggest US banks. We contribute to this literature using a novel approach to estimating nonparametric measures of scale economies and total factor productivity (TFP) growth. For US commercial banks, we find that around 73 % of the top one hundred banks, 98 % of medium and small banks, and seven of the top ten biggest banks by asset size exhibit substantial economies of scale. Likewise, we find that scale economies contribute positively and significantly to their TFP growth. The existence of substantial scale economies raises an important challenge for regulators to pursue size limit regulations

Knowledge Economy and Financial Sector Competition in African Countries

The goal of this paper is to assess how knowledge economy (KE) plays out in financial sector competition. It suggests a practicable way to disentangle the effects of different components of KE on various financial sectors. The variables identified under the World Bank’s four knowledge economy index (KEI) are employed. An endogeneity robust panel instrumental variable fixed-effects estimation strategy is employed on data from 53 African countries for the period 1996-2010. The following findings are established. First, education and innovation in terms of scientific and technical publications broadly bear an inverse nexus with financial development. Second, the incidence of information and communication technologies is positive on all financial sectors but increases the non-formal sectors to the detriment of the formal sector. Third, economic incentives have positive implications for all sectors though the formal financial sector benefits most. Fourth, institutional regime is positive (negative) for the semi-formal (informal) financial sector. The findings contribute at the same time to the macroeconomic literature on measuring financial development and respond to the growing fields of informal sector importance, microfinance and mobile banking by means of KE promotion. Policy implications and future research directions are discussed