Cost complementarities among banking and nonbanking activities of bank holding companies and the cost of regulation

A multiproduct quadratic cost function (MQCF) is used to investigate the issue of jointness in production of banking and nonbanking activities of bank holding companies. Federal Deposit Insurance Corporation data are used for banking activities and the Federal Reserve's FRY-llAS tapes are used to obtain nonbanking data. The two data sources are combined according to the highest bank holding company code to investigate whether cost complementarities exist between banking and nonbanking activities. Several alternative definitions for bank output are employed. Additionally, three nonbanking activities are defined as securities, insurance, and "other nonbanking activities." The results show significant cost savings from the joint production of banking and nonbanking activities, with one exception. Importantly, the exception is the insurance business. There are significant diseconomies of scope between banking and insurance activities. Point estimates are also presented for product-specific economies of scale for banking and the three nonbanking activities. Further, scale and scope economies results are presented after dividing the data into multi-bank holding companies and one-bank holding companies. The important result shows different conclusions regarding economies of scope between banking activities and securities suggesting structural differences between the organizational forms.