Economies of Scale and Scope in the European Banking Sector 2002-2011

This paper estimates economies of scale and scope for banks within the Eurozone between 2002 and 2011 and attempts to uncover the sources of those economies of scale and scope. Economies of scale are found to be positive and significant for all years and at all asset levels. When implicit too-big-to-fail subsidies are accounted for, economies of scale remain positive for the biggest banks during crisis years, but are negative outside of the crisis. Stronger scale economies are found for banks that focus on relationship banking compared to those that focus on transaction banking. The macro environment was found to play an ambiguous role, as the signs differed between simple cost estimations and more elaborate profit maximizing models. In the profit maximizing models, scale is found to correlate positively with the quality of ICT infrastructure and market concentration. Economies of scope are found to be positive for all years and to increase during crisis years. The results indicate that policy measures that attempt to limit scale and scope in the banking sector increase costs so that financial stability may be more efficiently guaranteed through other measures.