Scale Economies And Strategies In Banking

The issue of operational strategy in banking has a long history. In the last decades, PIMS developed from manufacturing industry has been the most important strategy in the banking. To enhance market share and scale did improve the profit of commercial bank, and the scale of commercial bank also became the index of its competitiveness. But the questions are that whether scale economies exist in banking and whether PIMS are thought of the most important strategy principle of commercial banks. This paper tries to answer these questions from a creative way after analyzing the business of the banks.Earlier studies pay less attention on operational strategy of service industry. After our research of previous papers, we conclude that PIMS tends to improve the industry where scale economies exist, and sometimes leads to merge. Some foreign scholars analyzed market performance of merged company, but most concluded that total cost did not reduce as they anticipated. Whether PIMS is practicable depends on the existence of scale economies.Unfortunately, there are different conclusions because earlier scholars chose different methods and index. Some scholars concluded scale economies exist in domestic commercial banks, but others don't think so. Therefore, the key point is to figure out the essence of business in commercial banks.In order to solve problems listed above, Firstly, this paper figured out the essence of business in commercial banks from asset aspect, and chose important index to evaluate economies of scale. Loans should be thought of input variable, but deposits should be thought of output variable. Secondly, after gathering operating data of domestic commercial banks, the author chose GTCF as analytical tool according to the character of data. At last, the paper makes use of GTCF to analyze the data of banks to evaluate scale elasticity of different banks from 1998 to 2006, and solve the questions listed above. In addition, the conclusion may be helpful for managers to draw up the right operational strategy. The statistic results indicated that scale economies didn't exist in all the samples during 9 years, and the extent of scale diseconomies is different. As a result, PIMS is not improving development of domestic banks any more from scale economies aspect. Pursuing high market share shouldn't thought of as the main approach to high market performance. On the contrary, SPC should be paid more attention than before, the quality of market share is more important than the quantity of market share. The commercial bank should develop customized services according to the personalities and needs of customer, and improve the service quality. Enhancing the customer satisfaction and loyalty should be considered as the most important approach to improve market performance and acquire competition advantages. The paper also found that scale diseconomies in state-owned banks are more serious than that in shareholding banks.The contributions of this study can be listed in two aspects. On the one hand, it can make up the limitation of the research of operational efficiency and operational strategy in banking. On the other hand, this paper displays the scale efficiency of domestic banks and develops creative opinions on operational strategy which are helpful for further improvement of banks. Of course, there are some drawbacks in this paper because of some limitations, and the feasibility of SPC and the difference between these two kinds of banks are good choices for further study.