An Analysis of Efficiency of Scale and Organizational Form in Commercial Banking

COST and output observations for a sample of banks are examined in this article to determine how the efficiency of banks is related to their size and organizational form. Three organizational forms are compared-unit banks, branch banks, and holding company subsidiaries. Knowledge about the ways in which size and organizational form affect bank efficiency is important because one objective of bank regulation is efficient production, and the policies of bank regulators influence the size and organizational form of banks. Regulatory decisions on chartering new banks and allowing bank mergers affect the size of banks through the effects of such decisions on the number of banks in individual bank markets. Regulatory decisions on establishing branch offices and acquiring banks through holding companies influence the organizational form of banks. The sample of banks used in this study consists of 898 commercial banks that participated in the Federal Reserve's Functional Cost Analysis Program in i968. 1 The banks in the sample are grouped in Table I by amount of their assets and their organizational form. Banks of all three organizational forms are drawn from a wide range of asset sizes, with concentrations in the range from io million to 50 million. Unit banks make up 5' per cent of the sample, 39 per cent of the banks are branch banks, and I o per cent are holding company subsidiaries.