What is scale worth today? We looked at more than 3,000 banks around the world, and found a relationship between banks’ cost-to-asset ratio and their market share (Exhibit A).* On average, tripling a bank’s market share reduces its cost-to-asset ratio by 25 basis points. (The same relationship holds true for cost-to-income and market share.)†However, only about 10 percent of the variation in efficiency is explained by the model.

In general, larger banks are more cost-efficient. So far, so predictable. But the research also found that scale effects vary considerably by country (Exhibit B, next page). They are strongest in digitally advanced markets such as Australia and Denmark,
where banking is rapidly moving online.

In these two countries, the top three banks by market share have
a cost-to-asset ratio of around 100 basis points, while the cost-to-asset ratio of the bottom quintile exceeds 350. This gap points to the increasingly  transformative effect of technology on the competitive landscape in banking. (It should be noted that
the even larger scale effect we found in Russia is influenced by factors other than technology: despite the central bank’s clean-up program, the Russian banking system is still fragmented, with more than 500 banks, many—particularly those in the bottom
quintile—being less efficient.)

In China and India, cost efficiency is associated with scale, but to a very different extent. In China’s banking sector, dominated by many corporate banks holding large balance sheets, the top quintile’s cost-to-asset ratio (92 bps) is half that of the lowest quintile (184 bps). Yet in India, while some  scale effect is visible, even the largest banks have a cost-to-asset ratio higher than 150 bps. That reflects Indian banks’ typically higher cost base: for
instance, they must maintain larger physical networks to lend in rural areas.


The impact of scale is less visible in the United States. Approximately 70 bps separate the bottom and top quintiles. This difference is partly explainedby the large off-balance-sheet business of the top US banks; all their costs are reported, but their asset base appears smaller than it actually is.

But scale effects could be expanding. US banks are on a path
of digitization and might soon achieve results akin to those of the largest banks in Australia and Denmark.


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