Merger-related cost efficiencies and economies of scale in commercial banking

Anthony F Bisceglio, Fordham University


When planning an intramarket merger, bank managers typically forecast savings of approximately 30% to 40% of the expenses of running the smaller bank within three years. The lure of such cost savings has caused banking industry merger and acquisition activity to run at a record pace recently. The banker and consultant view on merger-related cost savings is not shared by all. Many regulators and academic economists argue that numerous empirical studies have failed to establish the existence of economies of scale in banking. This dissertation provides evidence on the widely held notion that bank mergers produce cost savings. Utilizing methodologies established in previous work in this field, dispersion of costs, economies of scale and cost efficiencies were measured for 495 northeast commercial banks. This research project extends prior studies, however, by using the same data set to measure potential cost savings from simulated mergers and analyzing a number of mergers that subsequently occurred between banks in the original data set. The merged banks were examined pre- and post-merger to determine whether the mergers were likely to gene rate efficiencies ex ante and whether they appear to have generated efficiencies ex post. The major findings are as follows: No evidence for economies of scale was found. A wide dispersion of average costs was found for banks of similar size. X-efficiency, or managerial, differences were found to be very large relative to scale efficiency differences. And, ex post merger results for the banks reviewed were found to be in the range of savings expected under the X-efficiency hypothesis. The evidence demonstrates that there can be merger-related cost efficiencies in an industry characterized by no measurable economies of scale if there is substantive variation in the cost structure of individual firms and managerial efficiencies are "exportable." The evidence further suggests that regulator fears that interstate banking will create a number of very large banks with considerable cost advantages are unfounded. Size alone does not confer cost advantage. The banking organizations that prosper in the interstate banking era will be those that are best at establishing and exporting management efficiencies, not necessarily the largest.

Subject Area


Recommended Citation

Bisceglio, Anthony F, "Merger-related cost efficiencies and economies of scale in commercial banking" (1995). ETD Collection for Fordham University. AAI9520602.