Essay About Increased Cost Efficiency And Various European Countries

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Santomero & Eckles (2000), and
Berger et al. (2000), in recent papers,
discuss most of the questions above.
The alleged benefit of economies of
scale and scope is related to the
increased cost efficiency. The basic idea
is that the emergence of broad financial
firms enables costs to be lowered, if
scale or scope economies are relevant
and if the range of expansion is within
the band whereby they can be achieved.
If economies of scale and scope prevail,
increased size will help create systemic
financial efficiency and shareholder value to the firm. However, if
diseconomies prevail, both will be
destroyed. In an information — and
distribution-intensive industry with high
fixed costs such as financial services,
there should be an ample potential for
scale and scope economies.
Economies of scale exist when the
average cost decreases in scale over a
relevant range as output expands. If
this occurs, then larger institutions
may be more efficient. Some lines of
business benefit from scale while
others may be hampered by it.
Examples of potential gains of scale in
banking activity include physical
branch distribution network,
infrastructure software, and electronic
distribution systems. The literature
concerning economies of scale is inconclusive on the costs and benefits
of being big, since the results obtained
depend on the period studied or the
average size of the financial institution
in question.1 In general the findings
suggest few cost scale efficiency gain
from consolidation of large institutions
that normally are involved in
international activity. However, most
of the studies use data on financial
institutions from the 1980ÐÒs.2 It is
possible that the recent technological
progress — due to the use of the
Internet, phone centres, advances in
payment technology, etc. — may have
increased scale economies in
producing financial services, by
creating opportunities to improve cost
scale efficiency, through consolidation,
even for larger institutions. Indeed, some recent studies of
bank cost scale efficiency, using data
from the 1990s, suggest that there may
be substantial scale economies even at
large bank size, possibly due to
technological progress (Berger et al.,
2000). These studies tend to show that
the threshold level is increasing
compared with previous studies. In
this connection, some other recent
studies related to the European
experience (Altunbas et al., 1997 and
Goddard et al., 2001) show that, in
various European countries, banks can
obtain cost savings by increasing the
scale of production as well as by
reducing