THE ROLE OF FIXED COSTS AND COST COMPLEMENTARITIES IN DETERMINING SCOPE ECONOMIES AND THE COST OF NARROW BANKING PROPOSALS

''Narrow'' banking proposals would separate insured deposits from most types of bank lending. Using data from large U.S. banks, we examine the extent to which narrow banking proposals are likely to result in increased production costs. Production costs will rise for nonjoint provision of deposit and loan services if there are cost complementarities in producing the two outputs jointly or if joint production enables banks to spread their fixed costs more effectively. Unlike standard cost function approaches, our methods allow us to estimate the fixed-cost and cost-complementarity effects separately. We find the net production cost consequences of narrow banking to be negligible.