Scale and Scope Economies in the Chilean Banking System

Abstract

This paper estimates a cost function for the Chilean banking system for a sample comprising all banks operating during 1989-2000. We found evidence of increasing returns to scale for small banks but not for larger banks. We did not find support for the popular belief that a financial supermarket increases efficiency, as we found no evidence of economies of scope in banking. The strength of our results relies on the specification of the cost function and their robustness to different definitions of the basket of financial services and other robustness tests. Finally, among other results, the paper provides evidence that banks that held subordinated debt with the Central Bank (due to rescue measures adopted in the wake of the banking crisis of the early eighties) raised their efficiency levels after the latter debt with the Central Bank was extinguished.