Dynamic returns to scale and geography in U.S. banking

Abstract

We observe spatial cost dependence among medium-sized and large U.S. banks (1998Q1-2020Q4). We contribute to the literature by accounting for this using an accessible dynamic spatial econometric cost model. For a movement along a bank's output expansion path, we calculate the cost returns that spillover to/from the bank. The noticeable impacts of the 2020 COVID pandemic are on the spillover cost returns and not the own returns. These spillover returns suggest the pandemic led to the smallest (largest) banks becoming suboptimally smaller (bigger). A number of banks with high-ranking spillover returns have geographically concentrated branches and/or specialize in particular activities.