A Theory of Production for the Financial Firm

Abstract

Develops a theory of production for individual financial firms, focusing on national banks subject to regulation by the central bank. Discusses the estimation of cost functions for financial firms where input costs and output quantities are explanatory variables, and explores the principal areas of regulation that affect user costs. Examines the construction of user costs for financial firms, which are derived for the services from all assets or liabilities on a bank balance sheet or appearing on the income statement. Develops an intertemporal model of producer behavior where labor, materials and physical capital demands, and asset and liability holding decisions are simultaneously determined. Describes the empirical results for the variable profit function for 223 banks in 1979-84. Hancock is with the Department of Finance at the Leavey School of Business and Administration, Santa Clara University. Bibliography; index.