Scale effects on efficiency and profitability in the Swiss banking sector

Dr. Marc Blatter and Dr. Andreas Fuster

Issue
2021-15

Pages
35

JEL classification
G21, G28

Keywords
Bank efficiency, profitability, economies of scale, financial regulation

Year
2021

This paper analyzes efficiency and profitability in the Swiss banking sector over the period 1997-2019. We find strong evidence for scale economies: for most banks in the sample, efficiency and profitability increase with bank size. Using an instrumental variables strategy for a subset of geographically restrained banks, we find that the effect of size on efficiency and profitability is likely causal. Scale economies have been more pronounced since 2010 than in the years prior to the global financial crisis. There is little evidence for scale economies for the largest (systemically important) banks; their relatively lower efficiency and lower profitability appear driven by certain aspects of their business model. Our results further indicate that good capitalization and high efficiency and profitability are compatible.