Research on the Cost Consequences of Breaking Up Large Banks by Rutgers' Joseph Hughes and Cleveland Fed President Loretta Mester

Research on the Cost Consequences of Breaking Up Large Banks
by Rutgers' Joseph Hughes and Cleveland Fed President Loretta Mester

Ben Bernanke cites their work in his blog.

Ben Bernanke discussed his speech at the second symposium on Ending Too Big To Fail at the Minneapolis Fed and cited the paper of Hughes and Mester, "The Future of Large, Internationally Active Banks: Does Scale Define the Winners?"  See the link at footnote 3:  The link in the footnote to Hughes and Mester is

Hughes speaks at the Minneapolis Fed's Ending Too Big To Fail Symposium

Joseph P. Hughes, Professor of Economics, discussed the costs of breaking up big banks as a member of a panel at the Ending Too Big to Fail Symposium of the Federal Reserve Bank of Minneapolis on April 4, 2016: Listen to his speech. Read the conference program:

Cited in Bloomberg Business and the Wall Street Journal . . .

Joseph P. Hughes, Professor of Economics, and Loretta J. Mester, President of the Federal Reserve Bank of Cleveland, cited in the Wall Street Journal,* as leaders in the field of measuring economies of scale exhibited by large banks, have recently published a much cited study that, as the Journal noted,

". . . has found economies of scale at all sizes of banks, and that bigger banks enjoy higher economies of scale – that is, they are able to provide products at lower cost than smaller banks. That is a break from earlier research that did not find economies of scale at big banks.

"Their work finds that these cost advantages don’t just come from lower-cost funding investors are willing to give big banks because they believe the government will bail them out if trouble strikes – the cost advantage big bank critics focus on. In other words, there are good business reasons for banks to be big, according to their research.” **

Bloomberg Business (March 5, 2015) entitled a feature, "The Biggest Banks Are Not Ready to Shrink," and in a subtitle, "New rules give big banks an incentive to shrink their balance sheets. But for most, massiveness remains part of the business plan." In explaining the logic of the business plan, Bloomberg noted that the Hughes-Mester findings "challenge the conventional wisdom that banks exhaust their economies of scale once they reach $100 billion in assets."

The Economist (May 14, 2013) featured an online debate on the question, "Should big banks be broken up?" between Simon Johnson (MIT) and Charles Calomiris (Columbia University).  Calomiris cited the Hughes-Mester findings on large-bank scale economies in the first posting of the debate.***

The policy implications of this work for Too Big To Fail and for regulations aimed at controlling financial system stability under the Dodd-Frank Act have been discussed in a recent speech by Federal Reserve Vice Chairman Stanley Fischer (July 2014) as well as in a recent hearing (July 2014) of the U. S. Senate Committee on Banking on the question, "What Makes a Bank Systemically Important?"

This work has also been cited by Governor Jeremy Stein of the Federal Reserve Board in April 2013 (“Regulating Large Financial Institutions”) and by Governor Jerome Powell (“Ending ‘Too Big to Fail’”) in March 2013.

  * February 18, 2014
** “Who Said Large Banks Don’t Experience Scale Economies? Evidence from a Risk-Return-Driven Cost Function,” Journal of Financial Intermediation, 2013, 22:4, 559-585.

The Wall Street Journal featured research by Hughes, Jagtiani, and Mester on the financial performance of community banks and their small business lending.

A Wall Street Journal article published on June 22, 2016, "Small-Business Lending Doesn’t Suffer as Community Banks Grow," focused on research by Joe Hughes and coauthors Julapa Jagtiani and Loretta Mester that examined the financial performance of community banks and their small business lending. The Journal describes a key finding: "As small community banks get bigger, does their small-business lending take a hit? Joseph Hughes of Rutgers University, Julapa Jagtiani of the Federal Reserve Bank of Philadelphia and Loretta Mester, president of the Federal Reserve Bank of Cleveland, find no such evidence. They find a significant positive relationship between financial performance and the ratio of small-business loans to assets at large community banks, suggesting such banks would have financial incentives to boost their share of small-business loans as they grow." The paper is available at SSRN:

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