TECHNOLOGY AND COST EFFICIENCY IN UNIVERSAL BANKING A THICK FRONTIER - ANALYSIS OF THE GERMAN BANKING INDUSTRY

Using 1992 data of 1490 banks covering about 40% of German banking, we specify a multi-product translog cost function and follow the ''thick frontier''-approach to control for cost inefficiency when evaluating the technology of banking. Scale economies are found to exist up to a size of about 5 billion DM of total assets, with diseconomies being ca used by non-operating costs. There is hardly any evidence of economies of scope. Compared to cost inefficiency external factors play a surpr isingly strong role in explaining cost differences between high-cost a nd low-cost banks. Smaller banks turn out to be more responsive to inp ut prices.