ECONOMIES OF SCALE AND SCOPE IN BANK HOLDING COMPANIES (BHCS): A COMPARATIVE STUDY OF ORGANIZATIONAL PRODUCTION TECHNOLOGIES

Research on the effect of holding company arrangement on bank cost structure has received little attention. The primary purpose of the present research is an attempt to fill this gap. Specifically, this study analyzes and compares the cost structure of bank holding companies with cost structure of independent banks. The main objective is to examine whether or not bank holding company arrangement affects cost structure of banks. The Federal Reserve's Call Reports of Condition and Income for 1983 was used to estimate economies of scale and scope for bank holding companies and for independent banks. A translog cost function was employed to capture the multi-product nature of banks' production and also to examine the possibility of U-shaped bank cost curves. The cost model included five separate bank outputs and three input prices.;Methodologically, the present study extends previously published research on bank cost structure in at least three ways. First, it adopts a new methodology to measure economies of scope. Previous research has failed to actually measure economies of scope due to limitations of translog cost functions. Second the test of jointness among bank outputs is global, unlike the test adopted by previous research which only applied to the point of expansion of the translog model. Third the examination of bank cost structure is more comprehensive than previous research, because the analysis encompasses five bank outputs and three input prices as compared to the generally adopted procedure of using two output-two input model.;Briefly, empirical findings indicate that bank holding company arrangement does affect bank cost structure. Specifically, average cost curves for bank holding companies are relatively flatter than those of independent banks. Multi-bank holding companies are better able to exploit economies of scale and scope compared to one-bank holding companies and independent banks. In view of the possibility of future deregulation of product lines and barriers to geographic expansion in banking, the findings fail to support that further bank consolidation through bank holding companies is particularly anticompetitive.