Scale and scope economies in the multi-product banking firm

Gilligan, Thomas W.; Smirlock, Michael; Marshall, William G.

doi:10.1016/0304-3932(84)90041-2

Cited by 213 publications

(73 citation statements)

References 8 publications

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“…They are derived from risk diversification, lower average adminis-trative costs (Demsetz 1973), and the efficient use of large sunk costs like the construction of large networks of branches and ATM's (Cerasi et al, 1997). Additionally, Gilligan et al (1984) provide evidence that banking is characterized by economies of scope from joint production of financial services. Finally, in the absence of restrictions on entry, excessive inefficient profits are precluded (Baumol, 1982).…”

Section: Markups Measurement and Literature Reviewmentioning

confidence: 99%

Business Cycles: A Role for Imperfect Competition in the Banking System

Mandelman

2006

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: This paper studies the cyclical pattern of ex post markups in the banking system using balancesheet data for a large set of countries. Markups are strongly countercyclical even after controlling for financial development, banking concentration, operational costs, inflation, and simultaneity or reverse causation. The countercyclical pattern is explained by the procyclical entry of foreign banks, which occurs mostly at the wholesale level and signals the intention to spread to the retail level. My hypothesis is that wholesale entry triggers incumbents' limit-pricing strategies, which are aimed at deterring entry into retail niches and which, in turn, dampen bank markups. In the second part of the paper, I develop a general equilibrium model that accounts for these features of the data. I find that this monopolistic behavior in the intermediary financial sector increases the volatility of real variables and amplifies the business cycle. I interpret this bank-supply channel as an extension of the credit channel pioneered by Bernanke and Blinder (1988). Terms of use: Documents inJEL classification: C23, E32, G21, L12, O16

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Section: Markups Measurement and Literature Reviewmentioning

confidence: 99%

Business Cycles: A Role for Imperfect Competition in the Banking System

Mandelman

2006

SSRN Journal

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“…Using flexible functional forms, a number of more recent studies have reevaluated bank costs taking into account directly the potential for U-shaped average cost curves, multi-product production, and economies of scope, as well as scale effects. These studies generally have found that benefits from scale economies are fully exhausted at relatively low levels of output (Benston, Hanweck, and Humphrey, 1982;Berger, I-Ianweck, Humphrey, 1987;and Gilligan, Smirlock and Marshall 1984). In fact, significant diseconomies have been found for single office unit banks (Berger, Hanweck, and Humphrey).…”

Section: Background and Motivationmentioning

confidence: 99%

Relative price efficiency, technical change, and scale economies for large commercial banks

1990

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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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“…These probability distributions, presented in table 4, are designed to reflect the results of studies of risk and returns in banking and l2 Several studies estimate the effects of the combination of services offered by banks on their costs. See Gilligan, Smirlock and Marshall (1984), Benston, et. al.…”

Section: A Framework For Analyzing the Risk Of Bank Failurementioning

confidence: 99%

A Comparison of Proposals to Restructure the US Financial System

Gilbert¹

1996

Stability in the Financial System

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Scale and scope economies in the multi-product banking firm

Cited by 213 publications

References 8 publications

Business Cycles: A Role for Imperfect Competition in the Banking System

Business Cycles: A Role for Imperfect Competition in the Banking System

Relative price efficiency, technical change, and scale economies for large commercial banks

A Comparison of Proposals to Restructure the US Financial System

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