Small Banks and the 'Bedford Falls' Principle

For decades, academics have tried to determine what they call the â??optimal sizeâ? of a bank. There is no consensus on an answer, but several studies show that costs drop for a bank as it grows to a certain size, after which they remain stable until the bank becomes massive and costs rise again. The exact asset size of the point at which costs level off varies among studies. According to theory, though, small banks should have some very good reason for existing, because theyâ??re comparatively expensive to run.