How did bank holding companies prosper in the 1990s?

This paper examines the improved performance of US bank holding companies ( BHCs) from 1991 to 1997. Analysis of cost and profit functions using severa l alternative output specifications suggests that the gains were primarily due to productivity growth and changes in scale economies. Various economet ric methodologies yield productivity growth of about 0.4% per year and the optimal size seems to have increased in the 1990s era of deregulation, tech nological change, and financial innovation. Estimates of both productivity growth and economies of scale are robust across traditional and non-traditi onal output specifications. Despite the overall success, however, substanti al cost and profit inefficiency existed for BHCs of all sizes in the 1990s. These efficiency estimates are particularly sensitive to the output specif ication and failure to account for non-traditional activities like off-bala nce sheet (OBS) items leads profit efficiency, but not cost efficiency, to be understated for the largest BHCs. (C) 2000 Elsevier Science B.V. All rig hts reserved. JEL classification: G21; D21.