We point to the vast empirical literature in banking to argue that the current expansion of scale and scope in banking represents a puzzle. We then present two explanations that help us to understand why banks are getting bigger and doing more. Our explanations suggest that banks may be doing this to increase their shareholders' wealth and/or merely to enhance the reputation of their management (CEOs). The latter could lead to herd behavior involving banks that increase size and scope despite a dissipation of shareholders' wealth. Alternatively, increasing size and scope may offer strategic benefits (and hence increase shareholder wealth) in an environment with sufficient profitability in current operations and substantial uncertainty about future core competencies. We explore conditions under which either one of these competing explanations may dominate.

Discrepancies in International Data: An Application to China-Hong Kong Entrepot Trade by Robert C. Feenstra, Wen Hai, Wing T. Woo and Shunli Yao. Published in volume 89, issue 2, pages 338-343 of American Economic Review, May 1999

Fifty Years of U.S. Income Data from the Current Population Survey: Alternatives, Trends, and Quality by Daniel H. Weinberg, Charles T. Nelson, Marc I. Roemer and Edward J. Welniak. Published in volume 89, issue 2, pages 18-22 of American Economic Review, May 1999