TRADITIONAL AND NONTRADITIONAL BANKING - AN INFORMATION-THEORETIC APPROACH

This paper uses a multiproduct approach to analyze the costs of a sample of large banks, where bank outputs are measured to account for the different types of information produced by banks. Diseconomies of scope are found between traditional banking activities of originating and monitoring loans and nontraditional activities of loan selling and buying. This suggests maintaining fire walls between commercial bank functions and investment bank functions after the Glass-Steagall Act is repealed will not sacrifice joint production economies. It also suggests that arguments for repeal of the Act based on the existence of such economies are ill-founded.