Santomero and co-author David Eckles of the Wharton Financial Institutions Center found that size does indeed give financial institutions advantages that can boost profits. Large institutions enjoy certain economies of scale, he says. Plus, diversification across businesses provides some earnings stability. If an institution only sells mutual funds, for instance, the whole company will suffer if the fund business turns sour. But if that same firm also has a brokerage business, revenues and earnings from that operation can soften any blow from the fund side.
Big firms can also leverage distribution channels to cross-sell products and services.
But the article, which appeared in the October 2000 issue of Economic Policy Review, a publication of the Federal Reserve Bank of New York, says size is no guarantee of success. In fact, there are several reasons why a universal bank-style institution may actually become less stable. Further, a firm may deceive itself into thinking it is diversifying into different businesses when in fact it is not. A firm offering many products also becomes more complex, and complexity can cause management to be sluggish in reacting to changes in the market. It may be the case that the midsize firms are the ones having the most difficulty because they're big enough to have management problems but are not big enough to leverage their scale.