Cost efficiency, economies of scale and economies of scope in the British retail banking sector

Abstract

In this paper the efficiency characteristics of the British retail banking sector are investigated. Distribution free cost efficiency, economies of scale and economies of scope are all measured. The study employs a one way fixed effects model with a translog specification of productive technology. Both ‘production’ and ‘intermediation’ models of bank production are employed and contrasted. A substantial distribution of cost efficiency is observed in this most important commercial sector. Overall, slight dis-economies of scale are reported for the ‘intermediation’ approach and substantial diseconomies of scale are recorded for the ‘production’ approach. A substantial dispersion of cost efficiency is observed for this sector with both model specifications