The Risk-Adjusted Profit Function Measurement of Economies of Scale and Efficiency in Commercial Banking
Todhanakasem, Warapatr
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https://hdl.handle.net/2142/70445
Description
Title
The Risk-Adjusted Profit Function Measurement of Economies of Scale and Efficiency in Commercial Banking
Author(s)
Todhanakasem, Warapatr
Issue Date
1983
Department of Study
Business Administration
Discipline
Business Administration
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Banking
Abstract
Whether or not economies of scale exist in the commercial banking industry has been a subject of investigation in a number of cost function studies. The major problem with this approach appears to be the disagreement over which variable(s) would adequately represent bank 'output'. Previous results, therefore, have been sensitive to the output variable(s) used.
Recently, the profit function, rather than the cost function, has been praised as a more desirable approach because of its duality relationship with the production function. Moreover, the output level is not a variable in the profit function, thus eliminating the most difficult problem encountered in the cost function approach. The profit function also captures a more complete concept of efficiency.
This work examines the issues of economies of scale and organizational efficiency in commercial banking by applying the risk-adjusted profit function to the separate samples of approximately 500 unit banks and 500 branch banks for the years 1978-1980. The results indicate that economies of scale exist in branch banks at a greater degree than in unit banks. For both unit and branch banks, deposits are the sources of economies whereas bank premises, furnitures and fixtures are the sources of diseconomies. Branch opening also contributes to the economies of scale of branch banks. Affiliated unit and branch banks are found to be more efficient than their independent counterparts. One of the major policy implications is that branch banking and holding company form of organization should be encouraged or at least not discouraged.
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