Are there economies of scale in banking?

I had the pleasure to listen to a quite inspiring lecture by Amar Bhidé who argues for more personal relationships in finance and banking. The lack of the latter and their replacement by mechanical, engineering-like, one-fits-all approaches, might indeed have contributed a fair share to the immense credit losses of the recent past. Mortgages have not been given according to individual judgment in a case by case decision, but based on corporate guidelines. “Bankers” selling such credit were actually salespeople that encouraged (over)-stretching those rules as they were not responsible for credit quality, but profited from a high sales record. The proposal of bringing back personal relationships into banking and finance means we have to turn back time, say about thirty years.

Credit ratings based on volatility measures and standard criteria are to be replaced by personal judgment again. Taking this idea a step further might indicate that a change in the regulatory framework and an increase in capital requirements, as it is on the table right now, will not eliminate the systemic risk in finance. This would mean politics is aiming for the wrong trade-off. Higher capital requirements for financial institution will in one way or another decrease growth potentials in the real economy. This is seen as a trade-off against a more secure financial system. If the argument of a lack of personal relationship holds, higher capital requirements and stricter regulation come at a cost that is not offset by the desired gains. The trade-off should be to scale back or reverse the central decision making in banking. True, this would reduce the overall efficiency of banks, but so would the current plans of stricter regulation. All in all, it seems economies of scale are limited in banking and they have been overly exploited at significant long run costs, far outweighing the initial efficiency gains.

So back to the old days where you went to a bank and had to convince a person and not a form that you should get a loan. Doing this would probably help to keep the numbers of employed bankers from declining even further. The jobs, however, will not be the fly-high, get-rich immediately ones, they will be boring, average-pay banker jobs – as we remember them from some time ago.