One of the mere important and frequently researched topics in banking is the produclJon process. Previous studies of bank production, however, have employed a methodology which is not appropriate for regulated firms. We generate cost estimates for large commercial banks utilizing a generalized cost modal which subsumes the commonly used model as a special case. Our findings suggest that the traditional methodology is inappropriate for the sample banks and generates biased estimates of cost parameters, scale effects, and the influence of technological change. The new methodology allows us to measure directly the effect of regulation on bank costs. The effect found is small, but significant.Recent additions to the extensive literatare on production in commercial banking have incorporated duality theory and flexible functional forms to evaluate economies of scale and scope, competitive viability, and the costs of geographic restrictions to expansion. The studies generally fred that scale economies are exhausted at relatively low output levels. The policy implications are that cost economies should be given little consideration in regulatory decisions concerning bank acquisitions and expansion.Use of the existing literature as the basis for weighing cost economies in bank regulatory decisions may grant a more significant role to past studies than merited. Potential problems exists as a result of sample selection and the exclusion of relevant explanatory variables. However, the major problem with previous bank cost studies may be methodological. More specifically, recent studies have utilized dtmlity theory to generate a neoclassical cost function based on the maintained assumption of cost minimization with respect to market input prices in competitive markets. However, extensive evidence exists suggesting that this is not the behavior practiced by regulated fn'ms. Banking firms are subject to extensive regulation in nearly all facets of operations, raising the possibility that behavior consistent with cost minimization subject to market input prices may not occur.The purpose of this study is to generate cost estimates for large banks utilizing a

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