Scale economies and cost complementarities in commercial banks: On-and off-balance-sheet activities

Abstract

Bank off-balance-sheet (OBS) activities have grown dramatically, and have become significantly important especially at large banks. We investigate whether failure to incorporate OBS products may lead to a misspecification problem. Models that exclude deposits from the output specification suggest economies of scale, which vanish when deposits are included. We find that inclusion of OBS products has little effect on the scale economies measures. With only a few exceptions, the results provide no evidence of cost complementarities in joint production. The tremendous growth of bank OBS activities in the 1980s may be explained by the very small (approximately zero) pecuniary cost of these activities.