The year 1998 saw an unprecedented number of megamergers in the banking industry: NationsBank with BankAmerica, Bank One with First Chicago NBD, and Citicorp with Travelers Group to name the three largest mergers. These merged entities are hoping to offer one-stop shopping for financial services: everything from savings to home mortgages, investments, and insurance.

a. In the short run, what are the potential cost advantages of these mergers? Explain.

b. Is a $300 billion national bank likely to be more efficient than a $30 billion regional bank or a $3 billion state-based bank? What economic evidence is needed to determine whether there are long-run increasing returns to scale in banking?

c. Do you think the mergers are predicated on economies of scope?