How Do Bank Features and Global Crises Affect Scale Economies? Evidence from the Banking Sectors of Oil-Rich GCC Emerging Markets

Abstract

ABSTRACT This study investigates the types of scale economies (SE) for the exchange-listed banks of the Gulf Cooperation Council (GCC) countries over the 2000–2016 period, using the stochastic frontier for modeling banking technology that explicitly incorporates managerial preferences for the bank risk taking. It explores how the levels of economies of scale (ES) are associated with banks’ features that include the business model, risk, profitability, and capital strength. The results underscore that ES are exhausted over the subperiod 2000–2008, while substantial ES are available over the subsequent 2009–2016 subperiod that followed the global financial crisis. The ES are substantial especially for the small- and middle-sized banks. Based on the geographical location, banks operating in Bahrain and UAE have shown the highest levels of ES, while those in Saudi Arabia and Oman have shown the least. Regarding bank specialization, the investment banks have shown the highest levels of ES, while commercial banks have indicated the least ES. Concerning the bank features, we find that the levels of ES are not strongly correlated with the ratio of securities-to-total assets, the profitability from lending activities and the equity-to-capital ratio. These outcomes underscore that many banks in the GCC countries, mainly in the aftermath of the global financial crisis, have failed to alter their scales of operations to land on the most efficient scale that minimizes the average cost. Thus, the financial reforms that aim to restrict the motives of banks to expand their scale of business to benefit from the too-big-to-fail (TBTF) status, especially during financial crises, are not justifiable as a valued goal.