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Operating a bank in the USA requires a quite large amount of initial capital which includes deposits with a reserve bank. Thus, economies of scale serve as another barrier to a new entrant to the banking industry. But again, with changing market conditions and the invention of newer strategies, like reduction of fixed costs and development of 24-hour service in the industry, economies of scale play an important role in the banking industry. The banks with all the necessary resources could easily overcome the competition in the market in this case. In terms of economies of scope, a huge variety of service lines are offered to cover all the customer requirements. In the banking industry scenario, the competitive advantage in terms of economies of scale can be changed significantly with innovative technologies being introduced and huge mergers being carried out between banks.
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Customer deposits/loan ratio was increasing over the 5 years period however it started declining because of the financial crisis.During mergers and acquisitions, the economy of scale helps in reducing the tax margin of the acquiring bank (Williamson, et al, 2003, p.Thus, a large-scale bank potentially has more developmental perspectives and is more attractive to customers.
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329).Įconomies develop during the first three years of their existence, and after this period the profits start decreasing. When the bank is opening more branches, the cost of their opening decreases, and the bank becomes subject to economies of scale (Williamson, et al, 2003, p. The need of any bank to permanently develop and grow explains the existence of economies of scale. The banking industry is characterized by the development of the internal and external economies of scale and the economies of scope. Any industry that is earning a return on capital will tend to attract firms from outside the industry (Porter, 1998, p. The threat of new entrants into this industry serves as a direct constraint on the profit margins of established banks in the USA. This means that the USA commercial banking industry is faced with the threat of new entrants (Johnson, Scholes & Whittington, 2006, p.206). The surfacing of alien competitors with the capital required, innovative technologies, and executive skills as well as financial crisis have started to weaken the market share of the banks of North America. This fact is proven by the quick development of Barclays bank and HSBC group. The recent domination of the United States in the global commercial banking industry does not mean that commercial banking experienced a lack of competitors or new entrants from other parts of the world.