Branching restrictions and banking costs

Abstract

Previous research of banking costs has been limited by the choice of the functional form, irregularities in the estimated cost functions, and a failure to rigorously examine the difference between banks in branching states and banks in unit-banking states. This paper addresses these shortcomings. Banks are modelled as three-input-three-output cost minimizing firms. A three equation system is estimated using 1985 Functional Cost Analysis data. The findings indicate that banks in unit-banking states experience diseconomies of scale Banks in branching states experience diseconomies of scale at the bank level but economies of scale at the branch level. We also find evidence of economies of scope for branch-state banks but not for unit-state banks.