Scale economies and cost complementarities in commercial banks: On-and off-balance-sheet activities

Bank off-balance-sheet (OBS) activities have grown dramatically, and have become significantly important especially at large banks. We investigate whether failure to incorporate OBS products may lead to a misspecification problem. Models that exclude deposits from the output specification suggest ec...

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Bibliographic Details
Published in:Journal of banking & finance 1995-10, Vol.19 (7), p.1175-1189
Main Authors: Jagtiani, Julapa, Nathan, Alli, Sick, Gordon
Format: Article
Language:English
Subjects:
Banks
Commercial banks
Cost complementarities
Cost efficiencies
Costs
Economies of scale
Off-balance sheet activities
Scale economies
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Summary:Bank off-balance-sheet (OBS) activities have grown dramatically, and have become significantly important especially at large banks. We investigate whether failure to incorporate OBS products may lead to a misspecification problem. Models that exclude deposits from the output specification suggest economies of scale, which vanish when deposits are included. We find that inclusion of OBS products has little effect on the scale economies measures. With only a few exceptions, the results provide no evidence of cost complementarities in joint production. The tremendous growth of bank OBS activities in the 1980s may be explained by the very small (approximately zero) pecuniary cost of these activities.
ISSN:0378-4266
1872-6372
DOI:10.1016/0378-4266(94)00078-H