Cost synergies in the commercial banking industry: An econometric examination

This study contributes to the issue of bank product deregulation by examining whether cost synergies, measured by economies of scope, exist in the production of banking services. Using the multiproduct cost economies approach, the existence of overall and product-specific economies of scope and scale were investigated. The major model contains three equations--a cost function and two share equations. A generalized translogarithmic cost function includes five bank outputs and three input prices. The cost, output, price variables were standardized by their respective means. The two share equations were included in order to achieve better efficiency of the estimations. In addition, the system of equations must satisfy certain regularity restrictions such as symmetry and homogeneity. The system of equations was estimated using seemingly unrelated regressions (SUR) technique. The estimation of the cost function was carried out using a sample of 2,033 banks from Call Reports tapes for the three-year period 1985-1987. The cost functions for branch banks and unit banks were estimated separately.