The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals

Abstract

'Narrow' banking proposals would separate insured deposits from most types of bank lending. Using data from large U.S. banks, the authors examine the extent to which narrow banking proposals are likely to result in increased production costs. Production costs will rise for nonjoint provision of deposit and loan services if there are cost complementarities in producing the two outputs jointly or if joint production enables banks to spread their fixed costs more effectively. Unlike standard cost function approaches, the authors' methods allow them to estimate the fixed-cost and cost-complementarity effects separately. They find the net production cost consequences of narrow banking to be negligible. Copyright 1993 by University of Chicago Press.