Wichita speaker: There’s no perfect size for a bank

09/06/2012 6:53 PM

09/06/2012 6:54 PM

The 40 or so area bank executives — and one credit union boss — gathered in a meeting room Thursday at the Wichita Country Club represented banks ranging from $65 million to $4 billion in assets.

They were there to hear Bob DeYoung tell them what the ideal bank size is, in terms of assets.

The answer wasn’t cut and dried.

“If you ask bankers what the best size for a bank is, they don’t all agree,” said DeYoung, KU’s Capitol Federal Professor in Financial Markets and Institutions. “If you ask economists how big a bank should be, they surely won’t agree.”

DeYoung, who was invited to speak by Emprise Bank chairman Mike Michaelis, said the common thought is that the larger an institution, the greater its economies of scale, thus the lower its costs.

But an institution can get too big, to the point it has increases in marginal costs despite increasing output, DeYoung said. That is called diseconomies of scale.

He also pointed out that of the 10 largest financial holding companies in the U.S. in 2007, four — or 40 percent — of them failed or were bailed out during the banking crisis: Citigroup, Bank of America, Wachovia and Washington Mutual. In the same period, he said, only about 6 percent of smaller banks failed.

But the largest banks, those with assets of $25 billion or more, had the greatest return on equity of all banks between 1998 and 2007.

All things being equal, DeYoung said there is no ideal bank size. It’s more about how the banks manage their business plan.

“The primary driver of success is not size,” he said. “If you execute your model well you’re going to be fine.”

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