An Examination of Cost Subadditivity and Multiproduct Production in Large U.S. Banks

Abstract

A multiproduct cost function and the intermediation approach to analyzing bank production are used to thoroughly examine the subadditivity of costs in a sample of 311 of the 400 largest commercial banks in the US. Using a grid approach that imposes product mix constraints consistent with those observed among the sample firms, bank-output/product-mix cost comparisons are obtained that are more realistic than those typically found in the literature. By applying the methodology to a sample of larger banks, novel results are obtained on the nature of the cost functions of these large banks. The results imply that the cost functions of these large multiproduct banks are not subadditive and thus that there are not measurable cost complementarities in multiproduct production among these types of banks. This does not necessarily mean, however, that these banks would be better off breaking up production into a group of specialty firms.