How did bank holding companies prosper in the 1990s?

This paper examines the improved performance of US bank holding companies (BHCs) from 1991 to 1997. Analysis of cost and profit functions using several alternative output specifications suggests that the gains were primarily due to productivity growth and changes in scale economies. Various econometric methodologies yield productivity growth of about 0.4% per year and the optimal size seems to have increased in the 1990s era of deregulation, technological change, and financial innovation. Estimates of both productivity growth and economies of scale are robust across traditional and non-traditional output specifications. Despite the overall success, however, substantial cost and profit inefficiency existed for BHCs of all sizes in the 1990s. These efficiency estimates are particularly sensitive to the output specification and failure to account for non-traditional activities like off-balance sheet (OBS) items leads profit efficiency, but not cost efficiency, to be understated for the largest BHCs. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: G21; D21.