Are Some Banks Too Big?
How Economy of Scale proves Representative Maxine Waters may be Right
Lake Forest, IL (May 13, 2019) The Economy of Scale has eluded executives at banks, credit unions & thrifts. Even Adam Smith the first economist failed to give a complete description of how the economy of scale works in his book, The Wealth of Nations. “The economy of scale (EOS) is a very difficult algorithm to derive and process,” claims Michael Moebs, Economist & CEO for Moebs $ervices, Inc., an economic research firm. “While we have precisely devised how to do an EOS, it is best for executives to first learn how expenses flow as volume and size increase,” notes Moebs.
There is a point in the depository business where bigger is not better.
The Moebs EOS shows in the graph how expenses do fall as financial institutions become larger. Yet there is a point when big is just too big. EOS demonstrates total assets between $30 Billion and $100B is the optimal level of operating a financial institution, or the optimal level of EOS.
The goal for every depository is to reach economy of scale. Moebs research illustrates the EOS process commences when a financial institution reaches about $500 Million in assets. Up to this point, expense control and growth in assets need to be equal goals.
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Written By: m.moebs
Date Posted: 5/13/2019
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