9th Symposium on Finance, Banking, and Insurance
Universität Karlsruhe (TH), Germany, December 11 - 13, 2002

Abstract

Cost Structure in the German Banking Industry
- an Empirical Analysis

Klaus Greiber and B. Herz

Universität Bayreuth

We estimate the cost structure of the German banking industry between 1990 and 1996 using a translog approach. Firstly, we evaluate the relative efficiency and possible ga ins of bank mergers and acquisitions in the German banking industry. The empirical results indicate significant albeit modest economies of scale for small banks. Additionally, we find technical inefficiencies which are greater for smaller banks. Secondly, we assess the reliability of the translog approach. It is shown that standard translog estimations of the cost function have to interpreted with caution. For conventional sample size parameter estimates can be very unreliable due to a small sample bias. W e favour the thick frontier approach in relation to panel data models or in general a more sparse parameterization of the cost function.