Technological change in large U.S. commercial banks

Commercial banks in the United States have invested billions of dollars in financial systems technologies in recent years. During the 1981-85 period, for example, it is estimated that commercial banks invested approximately $30.0 billion in systems technology (e.g., hardware, system software, telecommunications, etc.). During the same period, systems expenses at commercial banks increased at an average annual rate of 17.6% as compared to a 10.5% annual increase in overall operating expenses.' These expenditures raise questions regarding the effect of these new technologies on the costs of providing financial services as well as their impact on efficient bank size and product mix. Investigation into these questions is of particular importance given the This article examines technological change, its relationship to firm size, and its impact on the efficient scale of output and product mix for large U.S. commercial banks. The results suggest that technological change lowered real costs by about 1.0% per year, increased the cost-minimizing scale of outputs, and affected product mix. We do not find support for the Galbraith-Schumpeter hypothesis. This suggests that the largest banks cannot use innovation alone to outpace smaller banks. The major implications are that public policies allowing freer banking combinations do not necessarily run counter to the public interest. * We thank an anonymous referee and Allen N. Berger, David B. Humphrey, and members of the Georgia State University, Georgia Institute of Technology, and Federal Reserve Bank of Atlanta Joint Workshop in Financial Institutions for their helpful comments. Any remaining errors are our responsibility. We would also like to thank the Kemper Foundation for financial support provided through the Emory University Business School. The opinions expressed in this paper are ours and not necessarily those of the Federal Reserve Bank of Atlanta or the Board of Governors of the Federal Reserve System. 1. See Salomon Brothers (1987) for a detailed analysis of technology expenditures at commercial banks.