Economies of scale o financial economies of scale

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Economies of Scale- o Financial economies of scale- better pooling as the pool is larges. Liquidity costs are lower, more diversified. The bank is more profitable o Operational economies of scale- indivisibility in fixed costs, lower for larger banks o Reputational economies of scale- people trust larger banks more o Diseconomies of scale- large banks are more difficult to control making the cost of management higher- what insures one bank won’t take over the industry The Technology of Communications- o Poor communication was barrier to branching until late 19 th century Regulatory Barriers- o Barriers in 19 th century England: Parliament prohibited creation of any other joint-stock/chartered bank. England banks remained small and undercapitalized. Law didn’t extend to Scotland- they were able to capitalize. Deregulation began soon o Rise and fall of US banks-federal chartered banks could branch nationwide. Went bad because branch owners would serve local interests o Obstacle to interstate banking- standard corporate charter at the time for banks prohibited the bank from conduction business outside the incorporating state Economies of Scale between banks: Correspondents and Money Markets Correspondent Banking- o A bank in another city that the bank has a business relationship with. In some ways, it was better than a branch- profitable relationship was incentive for good behavior o Respondent bank- small bank with relationship with a city bank/ big bank The Rise of a National Money Market in England- o Correspondent banks supported development of money market (market for short-term debt securities) The Rise of a National Money Market in the US- o market for call loan and market for commercial bills did not coincide. Each developed separately through correspondent system o Banking legislation of civil war worsened the fragmentation of American banking system. Lending was cut back dramatically and banks had little local competition so they exploited this. o Loan market was deteriorating why industrialization was increasing demand for credit Integration through Correspondent Banking and Money Markets- o Correspondent system allows lenders to lend to borrowers in another area o Lender makes deposit at his bank o Depositor’s bank deposits excess fund with correspondent o Correspondent lends funds in money market
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o Borrower borrows from his bank by discounting a bill, the borrower’s bank rediscounts the bill w correspondent and correspondent sells bill in money market o Finds a way back to payer’s bank through payer’s bank correspondent Consolidation in England and the Advantages of Branch Banking Joint-stock branch banks expanded- slowly replaced correspondent system. Branch banks could do system better and cheaper Lending involved a single intermediary rather than a series with branching system Advantage to borrowers- greater safety, branch banks able to satisfy
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