Too small to be compliant? Size and scale economies in the compliance cost structure of Italian banks

The enormous legislative activity, that has characterized the banking system in recent years, has forced banks to support substantial costs to ensure regulatory compliance. The significance of these costs is highlighted in many researches that show, respectively, the incidence of start-up and on-going costs on bank operational expenses. An excessive increase in the cost of compliance could result in an increase in the cost of banking services to end-users. Should there be economies of scale, smaller banks would have higher mean costs for compliance than the larger ones. Although in the past several studies have tried to quantify the cost of regulatory compliance and to verify the existence of economies of scale in this activity, no studies deal with this issue with respect to the Italian contest. The present work provides the magnitude of compliance costs and a first insight into the existance of scale economies using data on the start up compliance costs collected by the Italian Banking Association (ABI) ever since legislation on banking and financial transparency came into force. The analysis also emphasizes the relationship between the strength of the scale economies and the bank size.