Viability of Traditional Banking Activities: Evidence from Shifts in Conduct and Excess Capacity

This paper applies modem statistical techniques to estimate levels and shifts of market conduct and aggregate excess capacity in the provision of traditional US banking products such as loans and demand deposits. A variety of models indicate that loans are competitively supplied, with no obvious excess capacity as defined. Some models indicate an anticompetitive shift in demand deposits after 1984, but other evidence suggests that this result may be an artifact attributable to the growth of NOW accounts, MMDAs, and the like. All results suggest that the current levels of these services can be profitably sustained under current market conditions.