Size and earnings volatility of US bank holding companies

We examine whether bank earnings volatility depends on bank size. Using quarterly data for bank holding companies in the United States for the period 1995Q1-2010Q3 and controlling for the quality of management, leverage, and diversification, we find that bank size reduces return volatility. However, the effect is non-linear: when bank size exceeds a certain threshold (about US$5 billion) size is positively related to earnings volatility. The recent financial crisis decreased the threshold beyond which the impact of size on volatility turns positive.

► We examine for US banks whether earnings volatility depends on bank size. ► We find that bank size up to a threshold reduces return volatility. ► When bank size exceeds $5 billion size is positively related to earnings volatility. ► The financial crisis decreased this threshold.