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

A. Demirgüc-Kunt, H.P. Huizinga

Research output: Working paperDiscussion paperOther research output

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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.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Volume2011-005
Publication statusPublished - 2011

Publication series

NameEBC Discussion Paper
Volume2011-005

Fingerprint

Market discipline
Funding
Costs
Risk and return
Shareholders
Too big to fail
Corporate governance
Managers
Return on assets
Trade-offs
Government regulation
Subsidies
Bank risk
Expenses
Governance structure
National economy
Rate of return
Small countries
Growth strategy

Keywords

  • Bank size
  • systemic risk
  • market discipline

Cite this

Demirgüc-Kunt, A., & Huizinga, H. P. (2011). Do We need Big Banks? Evidence on Performance, Strategy and Market Discipline. (EBC Discussion Paper; Vol. 2011-005). Tilburg: EBC.
Demirgüc-Kunt, A. ; Huizinga, H.P. / Do We need Big Banks? Evidence on Performance, Strategy and Market Discipline. Tilburg : EBC, 2011. (EBC Discussion Paper).
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Demirgüc-Kunt, A & Huizinga, HP 2011 'Do We need Big Banks? Evidence on Performance, Strategy and Market Discipline' EBC Discussion Paper, vol. 2011-005, EBC, Tilburg.

Do We need Big Banks? Evidence on Performance, Strategy and Market Discipline. / Demirgüc-Kunt, A.; Huizinga, H.P.

Tilburg : EBC, 2011. (EBC Discussion Paper; Vol. 2011-005).

Research output: Working paperDiscussion paperOther research output

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Demirgüc-Kunt A, Huizinga HP. Do We need Big Banks? Evidence on Performance, Strategy and Market Discipline. Tilburg: EBC. 2011. (EBC Discussion Paper).