COST ANALYSIS FOR BRANCHING SYSTEMS: METHODOLOGY, TEST RESULTS, AND IMPLICATIONS FOR MANAGEMENT.

There have been numerous studies using different procedures to assess the impact of branching on the cost structure in banking. These studies were primarily concerned with the cost impact of branching in the context of a desirable banking structure. The effect of any combination of branching law, entry policy, and merger policy depends upon the cost structure in general, and the relative efficiency of various branching configurations (including, of course, none). However, these studies have not provided either results or a methodology that may be directly utilized in the important task of managing and evaluating the performance of a system of branches. The purpose of this paper is to develop and test (with a large multi-branch system), a model of branch operating costs that may be adapted and utilized by banks in estimating marginal and average costs, evaluating the performance of an existing branching system, and determining the minimal size necessary to justify the establishment of a branch in any specific location. In Section I, there is a discussion of previous studies. Section II contains the model and the data sources. A discussion and interpretation of the results are considered in Section III. Section IV provides the summary and conclusions.