The size of the bank - Economies of scale

We can find asymmetric information in all the relations in between the different agents in the financial system and with different magnitudes: the banks doesn’t have perfect information about the project, business, profile and intentions of his customers; the depositors doesn’t have exact information about the risk they’re taking when they allocate their money; the regulating authorities have difficulties to detect (and anticipate) bank solvency problems and situations. But in the case of bank/customer relation, that is our concern, the cost of information is directly related with his asymmetries, and assuming that banks are intermediaries of information, we’ll accept the theory developed by Berger and Udell (1995), that ‘the existence of financial intermediaries are the best evidence that the economies of scale on information are possible’ in this sector. In other words, we’ll accept that the average cost of information decreases as the amount of intermediated resources is augmented, which normally occurs when the size of the entity grows.

This is one of the mechanisms to reach scale economies on information, and can be achieved by the endogenous growth of the bank or by mergers and acquisitions like in a concentration process. But what is not very clear despite the synergies that can be obtained, is if all the information available before the consolidation can be efficiently absorbed. For example, small banks normally work with an important amount of informal information that is not completely standardized and even more difficult to adapt to the complex systems of a large bank. As result of this several information is lost due to the closing of branches or because is very expensive to include that type of information.

Is almost impossible to measure this kind of problem but there’re some anecdotic and empirical evidence (Cuenin, 2000) that would indicate that a large number of small business profiles have been lost in that period due to the mentioned closing of branches or due to discrepancies to connect the previous information and the risk systems applied like Veraz or Credit Scoring.

So far we’ve seen that the economies of scale can be obtained by growth, then the next question is how small banks can achieve information efficiency, and in this matter the answer is focused in which kind of information each type of entity, in terms of size, is based.