Core Deposits and Physical Capital: A Reexamination of Bank Scale Economies and Efficiency with Quasi-Fixed Inputs

This paper compares measures of bank production efficiency assuming all bank inputs are completely variable with measures obtained from specifications which take account of the quasi-fixed nature of core deposits and bank physical capital, and the treatment of certain deposits as outputs. The empirical results imply that scale economy measures vary substantially for small to medium-sized banks whereas those for the largest banks are fairly robust to the different specifications. Estimates of economies of scope were found to be invariant to different input/output specifications, whereas efficiency measures varied significantly with changes in the specification of the cost function and with the definition of outputs and inputs.