Financial Deregulation and Economies of Scale and Scope: Evidence from the Major Australian Banks

In this study a parametric approach employing a flexible translog functional model is used to estimate economies of scale and scope in the four major Australian banks (ANZ, NAB, CBA and WESTPAC). Two hypotheses are tested to determine whether bank economies of scale have changed and also whether economies of scope were exhausted following financial deregulation. The analysis reveals that there is evidence for a continuing difference in banks' economies of scale as a result of deregulation. The empirical evidence also suggests that economies of scope were not exhausted by financial deregulation. In addition, there is continuing evidence of considerable economies of scope in the four major banks. In other words, Australian banks have not fully embraced deregulation and adjusted their joint production in a cost efficient manner. Findings in this study indicate that further deregulation would create a more competitive and efficient banking environment in Australia.     

Scale Economies in Credit Unions: Accounting for Subsidies Is Important

In 1998, the Credit Union Services Corporation Australia Limited (CUSCAL) recommended that Australian credit unions with assets below $5 million should consider merging with larger credit unions. This industry position is at odds with empirical studies, which find little evidence of increasing returns to scale in credit unions. However, an important bias in previous studies of scale economies in credit unions has been the omission of credit union subsidies. This paper shows that the failure to account for subsidies biases the results toward finding diseconomies of scale. After correcting for the subsidy bias, there is very strong evidence of increasing returns to scale in a sample of New South Wales credit unions, supporting the industry recommendation.     

The composite cost function and efficiency in giant Japanese banks

This study provides further empirical investigation, in the context of giant Japanese banks, of the recent claim by Pulley and Braunstein (1992, A composite cost function for multiproduct firms with an application to economies of scope in banking, Review of Economics and Statistics 74, 221–230), that their new composite model for the multiproduct cost function has important advantages over the separable quadratic, generalized translog and standard translog models. In addition to assessing the composite model's relative ability in measuring global scope and scale economies, the study also extends the P-B analysis to assess measurement of product-specific scope and scale economies, pairwise cost complementarities between outputs, changes in the marginal costs of outputs and technological change. The results appear to confirm P-B's chain. The persistent finding of scale economies for large Japanese banks is also investigated and confirmed.     

中国银行业规模经济和范围经济的实证研究——基于复合成本函数的分析

本文首次在国内利用复合成本函数估计我国国有商业银行和股份制商业银行1998——2003年的成本函数,并计算出各自的规模经济和范围经济。复合成本函数把投入价格的对数二次项和产出的二次项结合起来,具有优良的实证研究性质。实证研究结果表明:时间对我国银行业的规模经济和范围经济影响不显著;国有商业银行和股份制商业银行都存在着轻微的规模不经济和范围不经济,国有银行略好于股份制银行。我国商业银行的两种产出——存款和贷款不存在成本互补性。     

基于规模经济和技术进步两种效应的商业银行效率研究

利用超对数成本函数,从规模经济和技术进步角度,对中国商业银行1995到2005年的效率进行实证表明,一方面,中国商业银行业存在着规模经济和技术进步正效应,这主要得益于股份制商业银行;另一方面,国有商业银行的规模不经济和技术进步负效应,导致中国商业银行业的效率较低.因此,要保持中国商业银行业效率的不断提高,必须压缩国有商业银行的规模,加快股份制商业银行的发展,改善商业银行的治理结构.完善金融人才的培养机制.     

A COST MODEL OF BUILDING SOCIETIES AS PRODUCERS OF MORTGAGES AND OTHER FINANCIAL PRODUCTS

This study examines the structural characteristics of UK building societies. The analysis views societies as multi-product firms which produce both mortgage and non-mortgage products. A two output, three input hybrid translog cost function is employed to obtain econometric measures of overall and augmented economies of scale; input-specific and augmented input-specific economies of scale; product-specific scale economies; and economies of scope. The empirical analysis offers three key insights into the industry. First, there is evidence of significant augmented economies of scale for both national and regional societies. Second, only national societies are able to reap input-specific economies of scale through the use of capital. Third, for regional and local societies, cost inefficiencies actually emerge in their production of mortgage and non-mortgage products.     

Do credit unions use their tax advantage to benefit members? Evidence from a cost function

This paper examines whether the credit union income tax subsidy is passed along to members or consumed by managers. To that end, we estimate a translog cost function for credit unions and mutual thrifts that is tailored to the unique objectives of mutually owned depository institutions. We find that credit unions with residential common bonds have higher costs than mutual thrifts, but single common bond occupational and associational credit unions are more cost efficient. Thus, it appears that residential credit unions engage in expense preference behavior and hence redirect some portion of their tax benefit away from members.     

Investigating the cost performance of UK credit unions using radial and non-radial efficiency measures

This paper examines the relative efficiency of UK credit unions. Radial and non-radial measures of input cost efficiency plus associated scale efficiency measures are computed for a selection of input output specifications. Both measures highlighted that UK credit unions have considerable scope for efficiency gains. It was mooted that the documented high levels of inefficiency may be indicative of the fact that credit unions, based on clearly defined and non-overlapping common bonds, are not in competition with each other for market share. Credit unions were also highlighted as suffering from a considerable degree of scale inefficiency with the majority of scale inefficient credit unions subject to decreasing returns to scale. The latter aspect highlights that the UK Government's goal of larger credit unions must be accompanied by greater regulatory freedom if inefficiency is to be avoided. One of the advantages of computing non-radial measures is that an insight into potential over- or under-expenditure on specific inputs can be obtained through a comparison of the non-radial measure of efficiency with the associated radial measure. Two interesting findings emerged, the first that UK credit unions over-spend on dividend payments and the second that they under-spend on labour costs.     

The evolution of cost-productivity and efficiency among US credit unions

Advances in information-processing technology have eroded the advantages of small scale and proximity to customers that traditionally enabled small lenders to thrive. Nonetheless, the membership and market share of US credit unions have increased, though their average size has also risen. We investigate changes in the efficiency and productivity of US credit unions during 1989–2006 by benchmarking the performance of individual firms against an estimated order-α quantile lying “near” the efficient frontier. We construct a cost analog of the Malmquist productivity index, which we decompose to estimate changes in cost and scale efficiency, and changes in technology. We find that cost-productivity fell on average across all credit unions but especially among smaller credit unions. Smaller credit unions confronted a shift in technology that increased the minimum cost required to produce given amounts of output. All but the largest credit unions also became less scale efficient over time.     

Scale and scope economies in the multi-product banking firm

The multi-product nature of the banking firm is examined utilizing the translog cost function. This analysis indicates that, contrary to conventional wisdom, natural monopoly, scale economies and product-specific decreasing costs are not robust characterizations of the banking industry. There is, however, evidence that the cost function is characterized by economies of scope. The implications of these results are discussed and extensions of this approach suggested.     

Economies of scale and technological development in securities depository and settlement systems

This paper investigates the existence and extent of economies of scale in depository and settlement systems. Evidence from 16 settlement institutions across different regions for the years 1993–2000 indicates the existence of significant economies of scale. The degree of such economies, however, differs by size of settlement institution and region. While smaller settlement service providers reveal a high potential of economies for scale, larger institutions show an increasing trend toward cost effectiveness. Clearing and settlement systems in countries in Europe and Asia report substantially larger economies of scale than those of the US system. European cross-border settlement seems to be more cost intensive than that on a domestic level, reflecting chiefly complexities of EU international securities settlement systems and differences in the scope of international settlement service providers. The evidence also reveals that investments in implementing new systems and upgrades of settlement technology continuously improved cost effectiveness over the sample period.     

Regularity conditions and scope estimates: The case of large-sized U.S. banks

We consider economies and diseconomies of scope for large U.S. banks by employing ordinary and hybrid translog cost functions. We examine the regularity conditions in output space where scope estimates are calculated and reject all models for which these conditions fail. The translog model always possesses violations. For the hybrid translog, violations occur in every case except one. In this one case, we find economies of scope.     

A Multi-Product Cost Study of the U.S. Life Insurance Industry

This paper reports estimates of overall and product specific economies of scale, as well as, economies of scope for the main outputs of the life insurance industry. In addition, the paper presents a number of structural tests of the production technology. The results indicate that the estimated cost function satisfies the regularity conditions, that the industry exhibits overall and product specific economies of scale, and that there are significant economies of scope between the main lines of business.     

A Fundamental Approach to Estimating Economies of Scale and Scope of Financial Products: The Case of Mutual Funds

We propose a Fundamental approach to estimate the economies of scale and scope for financial institutions offering multi-product lines. We first estimate pure economies of scale from its fundamental definition, which is the marginal cost reduction that is to be achieved by single product firms of increasing size that offer the same product. Similarly, we estimate the economies of scope from its fundamental definition, as the marginal cost reduction achieved by the addition of a new product line. Operationally, we compare the cost of operating a say, 3 product-line financial institution with the cost of operating a portfolios of companies that are synthetically created from a control sample of financial institutions offering fewer, such as 2 and 1 similar product lines. When this approach is applied to mutual funds data, we find economies of scale for some fund type. The evidence on marginal cost economies due to increasing scope is rather weak. The results have practical implications for potential organizers and current management of investment companies.     

Cost efficiency in the European securities settlement and depository industry

We examine whether the European settlement and custody institutions operate in an efficient way. To do this, we start from an analytically founded discussion regarding the activities performed by the operators in this sector. Based on the insights obtained, we estimate both a translog cost function and a constant elasticity of substitution – quadratic cost function. From the results obtained, there clearly are economies of scale in this industry. Moreover, also economies of scope between the activities performed are present. These findings imply that probably further consolidation is ahead, and that separating certain activities from others can only be done at a cost in terms of efficiency.     

Efficiency and technical progress in banking Empirical results for a panel of German cooperative banks

Using 1989–1992 individual data of 757 German cooperative banks and applying the intermediation approach we specify a multi-product translog cost function for this part of the German banking industry. For all size classes moderate economies of scale can be identified. There is also evidence of economies of scope which supports the notion of universal banking. As for cost efficiency, we find that the average banks in all size classes deviate considerably from the best practice cost frontier. All banks enjoy growth of total factor productivity, which is higher for the smaller banks in the sample.     

AN EXAMINATION OF PUBLIC RETIREMENT SYSTEMS UTILIZING A TRANS-LOG FUNCTIONAL FORM

This paper analyzes economies of scale of state and municipal retirement systems using the 'state-of-the-art' translog methodology. The primary reason for using a translog model is that an elasticity coefficient – measuring changes in cost with respect to output – can be calculated at each level of output. The previously used double log model results in a constant elasticity for the entire set of data. By using a translog model, a better understanding of the cost-output relationship might ultimately result in administrative cost savings.     

Modelling the Performance of Irish Credit Unions, 2002 to 2010

This study undertakes a modeling based performance assessment of all Irish credit unions between 2002 and 2010, a particularly turbulent period in their history. The analysis explicitly addresses the current challenges faced by credit unions in that the modeling approach used rewards credit unions for reducing undesirable outputs (impaired loans and investments) as well as for increasing desirable outputs (loans, earning assets and members’ funds) and decreasing inputs (labour expenditure, capital expenditure and fund expenses). The main findings are: credit unions are subject to increasing returns to scale; technical regression occurred in the years after 2007; there is significant scope for an improvement in efficiency through expansion of desirable outputs and contraction of undesirable outputs and inputs; and that larger credit unions, that are better capitalised and pay a higher dividend to members are more efficient than their smaller, less capitalised, and lower dividend paying counterparts.     

MULTIPRODUCT COST FUNCTIONS AND SCALE ECONOMIES IN BANKING

This study provides new and efficient estimates of scale economies in banking. Recent criticism of the incorrect specification of homogeneity restrictions on the translog cost functions is addressed, and correct estimations are provided. The results indicate that such misspecifications do affect measures of scale economies. The study covers 1980 to 1983 for unit and branch banks. The estimation is further enhanced by introducing factor share equations invoking Shephard's lemma and using an iterative Zellner procedure. The results fail to indicate scale economies for the overall sample. Some evidence of small degrees of scale economies is observed in parts of the sample.     

The growth of US credit unions

The growth of US credit unions during the 1990s is investigated empirically, using univariate and multivariate cross sectional and panel estimation techniques. Univariate tests of the law of proportionate effect suggest that in general large credit unions grew faster than their smaller counterparts. On average credit unions with above-average growth in one period tended to experience below-average growth in the next. Smaller credit unions tended to have more variable growth than large ones. While credit unions share a common co-operative philosophy, they differ in terms of age profile, scope for membership growth, charter type and financial structure and performance. In estimations of a multivariate growth model, most of these characteristics are found to have a significant influence on the size-growth relationship. While large state chartered credit unions grew faster than their smaller counterparts, the reverse was true for federally chartered credit unions. In general, if larger credit unions grew faster than smaller ones, they tended to do so for specific reasons: because their charters were less restrictive, because they were more efficient, or because they had a financial structure that was more conducive to growth. Therefore credit union growth was not ‘random', but highly systematic.