The role of scope and scale economies in recent large bank mergers
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The recent mega-merger activity in the u.s. banking industry raises many issues. Most important is the question of whether these mergers result in more profitable banks. A review of the literature on cost savings due to economies of scope and scale suggests that only those savings from the diversification of risk are present. The savings due to this diversification are substantial, but we also need to look at other areas of cost savings. Theories such as the information hypothesis, the market-power hypothesis, the inefficient-management hypothesis, and the too big to fail theory lead us to believe that the merging of these banks can substantially reduce costs. If the recent mega banks prove to be profitable, we may see the average size of banks increase. This may also lead to the dominance of a few super-banks, those that have already begun this trend.