Economies of Scale and Scope in Banking: Evidence From a Generalized Translog Cost Function

Abstract

This paper provides new evidence on the extent of economies of scale and scope in the banking industry. A generalized translog statistical cost function is used to avoid a number of substantive problems associated with the estimation and use of the conventional translog statistical cost function. The presence of statistically significant, relatively large economies of scale for all size classifications is reported. These economies of scale remain well beyond a bank size of $1 billion of total assets. No evidence is found of statistically significant global scope economies. There appear to be economies from the joint production of selected product pairs, but these efficiencies appear to be offset by diseconomies in the production of others. Thus, the results do not provide support for the existence of natural monopoly in the commercial banking industry. They do suggest, however, that many smaller banks can improve their productive efficiency through increases in size.