SCALE AND SCOPE ECONOMIES AT LARGE BANKS - INCLUDING OFF-BALANCE SHEET PRODUCTS AND REGULATORY EFFECTS (1984-1991)

This paper examines the impact of the risk-based capital (RBC) require ments on bank cost efficiencies. We take into consideration both on- a nd off-balance sheet (OBS) products and allow product mixes to differ across banks and to vary over time. Our empirical results suggest that the cost structures of large banks are significantly different during the pre-RBC and post-RBC periods. That is, the RBC change seemed to r educe the optimal bank size that achieves maximum scale and scope econ omies, so that some of the large banks that previously were efficient became too large and inefficient. The results suggest that regulations that encourage large banks to expand their production and product mix es any further will likely result in a less efficient banking industry .