Too big to fail, too big to succeed or too complex to succeed? : evidence for U.S. bank holding companies

Abstract

This study examines the joint and separate effects of scale and scope economies on the performance of U.S. bank holding companies (BHCs) as measured by return on assets (ROA) and utilizing a database obtained from the U.S. Federal Reserve under the Freedom of Information Act provisions. Consistent with recently expressed concerns regarding the operating performance of “too big to fall” banks, this study finds little support for economies of scale for U.S. BHCs and supportive evidence of diseconomies of scope in organizational complexity measured by subsidiaries. In particular, negative relations between organizational complexity and BHC performance is found to be more pronounced for the largest and most complex BHCs. In addition, associations between the organizational complexity and BHC performance are further found to vary by subsidiary type. Specifically, BHCs with both U.S. domestic and foreign subsidiaries exhibit economies of scope in operating domestic subsidiaries and diseconomies of scope in operating inherently more complex foreign subsidiaries. By contrast, BHCs with only U.S. domestic subsidiaries exhibit diseconomies of scope in organizational complexity in these domestic subsidiaries. As such, this study documents key distinctions that extend literatures on banking scale and scope economies relevant to policy makers, regulators, researchers, managements, and other stakeholders regarding the effects of size and organizational complexity on the operating performance of U.S. bank holding companies.