Determinants of Bank Growth? It

¶ … determinants of bank Growth? It can be said that the total output of any economy lies in the basic functioning of its various resources, like for example, the factors of labor and physical and human capitals, and the method in which these resources are utilized for the purpose of ensuring the smooth flowing of the goods and the resources involved. This is also known as the GDP. The facts can be stated in the form of an economy-wide production role, along with a total factor productivity figure. Growth can also be stated in the following determinants: a deepening of the physical capital, an accumulation or collection of human capital, and a measurement of the growth of productivity. Though this type of idea of growth determination is quite clear cut and simple, one must be careful that the sources-of-growth equation is not misinterpreted, because the fact remains that both accumulation and growth are in fact endless and it is easy to overlook this. (APU Special Lecture on Development Strategy)

What are the main features of Gibrat's 1931 Law of Proportionate Effect? Robert Gibrat was a French economist, who lived from 1904 to 1980. His theory, sometimes referred to as 'Gibrat's Law' is one that states that the proportional change in the size of a company according to the changes in the economy will be the exact same for all companies, irrespective of whether the company is a large or a small one. For example, if a company changes over time and shows a growth of $20 million from its starting point of $10 million, then the same principle and rate of growth will hold true for a smaller company that has started off with a sales figure of $1 million. (Gibrat's rule of proportionate growth)

However, is this law valid, and how is it applicable to Banking Markets? When Gibrat's Law was tested and evaluated in North America, it was found that there had two results; one was that the law held, and the second was that was in existence a very negative relationship between the size of a company and its growth. In studies in Germany, however, it was found that the same relationship was a positive one, and this underlined the fact that there are major differences in all institutions in different countries, like for example, in financial institutions. There has been recent interest in re-establishing the validity of Gibrat's Law and this has resulted in the attempt to relate the Law to the present day banking markets. (R&D Intensity and Firm Growth and Institutions in Germany)

The question here is, why do some firms grow in size at a fast rate? Some of the factors put across by researchers are that of economics of scale as well as of scope, the gains that era achieved by the companies on account of their larger sizes, the 'entry-deterring' plans by the companies, and the utilization of other forms of market power. Researchers also state that this may have the inevitable result of the increased concentration of industrial sectors over a period of time. Some countries analyze the firm size distribution within their country by means of certain theories of skewed distributions, and this is based on the 'lognormal system', which in turn is based on the so-called 'stochastic model' wherein the logarithmic size of the company is based on a study of the chronological sequencing of definitely random 'growth shocks'. (Dynamics of growth and profitability in Banking)

This type of study was actually initiated by Gibrat in his theory of the Law of Proportionate Effect. When the theory was applied, it was found that when manufacturing data was analyzed, there was in fact no relationship or a positive relationship in existence between the size of the company and the growth rates that it demonstrated. These are the results of studies conducted by Mansfield in 1962, Utton in 1972, and Singh and Whittington in 1975. However, according to the study conducted by Hart and Prais in the year 1956, most companies demonstrated an 'inverse size-growth relationship' for certain times, and the theory of the Law of Proportionate Effect was thus rejected completely by them. Certain studies conducted by Hall in 1897, Dunne and Hughes in 1994, Hart and Oulton in 1996, and more recently, Blonigen and Tomlin in 2001 that were based on the manufacturing data of certain companies, showed that the size and the growth relationship of these companies, whether taken at the firm or at the plant level, was in fact negative. (Dynamics of growth and profitability in Banking)

In the Banking sector, the study conducted by Alhadeff and Alhadeff in 1964 show that between the years 1930 and 1960, it was discovered that smaller banks in the United States of America grew much faster than larger sized banks. The various studies conducted by Rhoades and Yeats in 1974, and by Yeats et al. In 1975 demonstrate the fact that the growth of banks in the U.S.A. was affected to a large extent by its size. Wilson and Williams in 2000, and Scholtens in 2000 found that there was no evidence or proof of mean-reversion in the size of the banks being analyzed over the specified period of time. Saunders and Walter in their study conducted in 1994 state that there did exist an inverse size-growth relationship in banks, at an International level, for the time period from 1982 to 1987. (Dynamics of growth and profitability in Banking)