Description

This paper explores cost efficiency in the Chilean banking industry. We found evidence of increasing returns to scale up to medium size banks, but not such evidence for larger banks. We do not found evidence of scope economies, which does not support the common wisdom that a financial supermarket does necessarily increase efficiency. Overall, the absence or small gains to changing the scale of production or to diversifying the output mix reveal a Chilean banking industry operating efficiently in terms of cost during the nineties. The strength of this result relies on the representation of the technology for the banking industry by a cost function that appropriately takes care of the bias towards scale diseconomies that a translog specification would have imposed. Moreover, the results are robust to distinct definition of the output vector. Finally, we also provide evidence that banks that hold debt with the Central Bank due to rescue measures implemented after the banking crisis of the early eighties were not operating efficiently in terms of cost up to mid 1990's.