THE MULTIBANK HOLDING COMPANY EFFECT ON COST EFFICIENCY IN BANKING

This paper tests the hypothesis that differences in the organizational form embodied in independent banks, one-bank holding companies, and m ultibank holding companies result in differences in operating cost eff iciency. The transaction and agency cost paradigms for analysis of org anizational efficiency provide theoretical motivation for the hypothes is. The effects of organizational form on bank operating expenses for individual banks are evaluated on subsamples divided into quartiles ba sed on total revenue. Results indicate that for banks having revenues in the lowest quartile, both one-bank and multibank holding company af filiates are cost efficient relative to independent banks. Multibank h olding company affiliates are cost efficient relative to both one-bank affiliates and independent banks for banks in the interquartile range . No significant differences in cost efficiency are noted banks in the highest revenue quartile. Relative efficiency at the organizational l evel is also evaluated. Results provide evidence of lower operating co sts for banking operations of both multibank and one-bank holding comp any organizations relative to independent banks. Taken as a whole, the results imply that holding company affiliation conveys cost advantage s to banking units below the 75th revenue percentile.