Question 14.P.3: Based on what you learned from reading this chapter and from...

a. A new bank offering traditional banking services (principally deposits and loans) was chartered earlier this year, gaining $50 million in assets within the first six months.

This bank should benefit from the increase in size as economies of scale take effect. This firm should continue to enjoy economies of scale as it grows in the next several years. However, these economies of scale will not continue indefinitely and there is some evidence that economies of scale are exhausted fairly quickly in banking firms.

b. A community bank with about $250 million in assets provides traditional banking services but also operates a small trust department for the convenience of families and small business.

This bank probably does not benefit much from economies of scope. The trust business is small and if it is mostly a convenience for families and small businesses it does not seem it would be much less costly to jointly produce these services.

c. A financial holding company (FHC) with about $2 billion in assets offers a full range of banking and investment services, giving customers access to a family of mutual funds.

Economies of scale start to disappear in about this range although there may be some small economies of scale that still exist up until the size of about 10 billion. There does not appear to be much evidence that exists to support the idea of economies of scope. No economies of scope can be documented

d. A bank holding company with just over $10 billion in assets also operates a security brokerage subsidiary, trading in stocks and bonds for its customers.

This firm appears to be outside of the range where any economies of scale exist. The evidence for economies of scope is not clear and there does not appear to be much support for any large economies of scope.

e. A financial holding company (FHC) with $750 billion in assets controls a commercial bank, investment banking house, chain of insurance agency offices, and finance company and supplies commercial and consumer trust services through its recently expanded trust department.

This firm appears to be much larger than necessary to generate any economies of scale and the evidence for economies of scope suggest that there is not much economies of scope in this industry.