Cost Structure in French Banking: A Reexamination Based on a Regular CES-Quadratic Form

Abstract

This article reexamines the modelling of a multiproduct cost function for a sample of French banks. We use the CES-quadratic functional form instead of the more traditional translog model which displays some failures. Applying this cost function to a model with two types of loans (customer and interbank loans) permits an analysis of variability of the usual indicators of economies of scale and economies of scope according to the levels of credit accorded by banks. This enables us to spot regions of production efficiency and more generally to describe precisely different possible situations. Our main finding suggests that small banks (i.e.. with a level of credit for the year 1987 lower than FF 25 billion), including specialized units, benefit from large economies of scale and scope owing to the presence of fixed costs. The large units incur more or less substantial diseconomies of scale depending on the way they profit from the complementarity of different types of loans.