The Effects of Geographic Expansion on Bank Efficiency

Byline: Allen N. Berger (1,2), Robert DeYoung (3) Keywords: banks; efficiency; mergers; financial institutions Abstract: We assess the effects of geographic expansion on bank efficiency, using cost and profit efficiencies estimated for over 7000 U.S. banks from 1993 to 1998. We find both positive and negative links between geographic scope and bank efficiency. Parent organizations exercise some control over the efficiency of their affiliates, although this control tends to dissipate with the distance to the affiliate. However, on average, distance-related efficiency effects tend to be modest, and our results suggest that some efficient organizations can export efficient practices to their affiliates and overwhelm any effects of distance. The results imply there may be no particular optimal geographic scope for banking organizations--some may operate efficiently within a single region, while others may operate efficiently on a nationwide or international basis. Author Affiliation: (1) Board of Governors of the Federal Reserve System, Washington, DC (2) Wharton Financial Institutions Center, Philadelphia (3) Federal Reserve Bank of Chicago, USA Article History: Registration Date: 23/10/2004