Do We Need Big Banks? Evidence on Performance, Strategy and Market Discipline

50 Pages Posted: 4 Mar 2011 Last revised: 20 Apr 2011

See all articles by Asli Demirgüç-Kunt

Asli Demirgüç-Kunt

World Bank

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2, 2011

Abstract

For an international sample of banks, we construct measures of a bank’s absolute size and its systemic size defined as size relative to the national economy. We then examine how a bank’s risk and return, its activity mix and funding strategy, and the extent to which it faces market discipline depend on both size measures. While absolute size presents banks with a trade-off between risk and return, systemic size is an unmitigated bad, reducing return without a reduction in risk. Despite too-big-to-fail subsidies, we find that systemically large banks are subject to greater market discipline as evidenced by a higher sensitivity of their funding costs to risk proxies, suggesting that they are often too big to save. The finding that a bank’s interest cost tends to rise with its systemic size can also in part explain why a bank’s rate of return on assets tends to decline with systemic size. Overall, our results cast doubt on the need to have systemically large banks. Bank growth has not been in the interest of bank shareholders in small countries, and it is not clear whether those in larger countries have benefited. While market discipline through increasing funding costs should keep systemic size in check, clearly it has not been effective in preventing the emergence of such banks in the first place. Inadequate corporate governance structures at banks seem to have enabled managers to pursue high-growth strategies at the expense of shareholders, providing support for greater government regulation.

Keywords: Bank Size, Systemic Risk, Market Discipline

JEL Classification: G21, G28

Suggested Citation

Demirgüç-Kunt, Asli and Huizinga, Harry, Do We Need Big Banks? Evidence on Performance, Strategy and Market Discipline (March 2, 2011). CentER Discussion Paper No. 2011-021, European Banking Center Discussion Paper No. 2011-005, Available at SSRN: https://ssrn.com/abstract=1774869 or http://dx.doi.org/10.2139/ssrn.1774869

Asli Demirgüç-Kunt

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Harry Huizinga (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
252
Abstract Views
1,798
Rank
217,177
PlumX Metrics