Keywords: Banks, community banking, bank size, multimarket banks, technological progress.
Abstract: We offer and test two competing hypotheses for the consolidation trend in banking using U.S. banking
industry data over the period 1982-2000. Under the efficiency hypothesis, technological progress improved the
performance of large, multimarket firms relative to small, single-market firms, whereas under the hubris
hypothesis, consolidation was largely driven by corporate hubris. Our results are consistent with an empirical
dominance of the efficiency hypothesis over the hubris hypothesis-on net, technological progress allowed large,
multimarket banks to compete more effectively against small, single-market banks in the 1990s than in the 1980s.
We also isolate the extent to which technological progress occurred through scale versus geographic effects and how
they affected the performance of small, single-market banks through revenues versus costs. The results may shed
light as well on some of the research and policy issues related to community banking, and on the question of how
community banks should be defined.
Full paper (250 KB PDF)
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Last update: April 29, 2005