Mr

Santomero & Eckles (2000), and

Berger et al. (2000), in recent papers,

discuss most of the questions above.

The alleged benefit of economies of

scale and scope is related to the

increased cost efficiency. The basic idea

is that the emergence of broad financial

firms enables costs to be lowered, if

scale or scope economies are relevant

and if the range of expansion is within

the band whereby they can be achieved.

If economies of scale and scope prevail,

increased size will help create systemic

financial efficiency and shareholder value to the firm. However, if

diseconomies prevail, both will be

destroyed. In an information вЂ" and

distribution-intensive industry with high

fixed costs such as financial services,

there should be an ample potential for

scale and scope economies.

Economies of scale exist when the

average cost decreases in scale over a

relevant range as output expands. If

this occurs, then larger institutions

may be more efficient. Some lines of

business benefit from scale while

others may be hampered by it.

Examples of potential gains of scale in

banking activity include physical

branch distribution network,

infrastructure software, and electronic

distribution systems. The literature

concerning economies of scale is inconclusive on the costs and benefits

of being big, since the results obtained

depend on the period studied or the

average size of the financial institution

in question.1 In general the findings

suggest few cost scale efficiency gain

from consolidation of large institutions

that normally are involved in

international activity. However, most

of the studies use data on financial

institutions from the 1980Ð'Ò's.2 It is

possible that the recent technological

progress вЂ" due to the use of the

Internet, phone centres, advances in

payment technology, etc. вЂ" may have

increased scale economies in

producing financial services, by

creating opportunities to improve cost

scale efficiency, through consolidation,

even for larger institutions. Indeed, some recent studies of

bank cost scale efficiency, using data

from the 1990s, suggest that there may

be substantial scale economies even at

large bank size, possibly due to

technological progress (Berger et al.,

2000). These studies tend to show that

the threshold level is increasing

compared with previous studies. In

this connection, some other recent

studies related to the European

experience (Altunbas et al., 1997 and

Goddard et al., 2001) show that, in

various European countries, banks can

obtain cost savings by increasing the

scale of production as well as by

reducing