The Two Product Banking Firm under Uncertainty

• Published in: Southern economic journal Vol. 49; no. 4; pp. 1002 - 1017
• Main Author: Elyasiani, Elyas
• Format: Journal Article
• Language: English
• Published: Chapel Hill, N.C., etc Southern Economic Association and the University of North Carolina at Chapel Hill 01.04.1983; Southern Economic Association and the University of North Carolina; Southern Economic Association
• Subjects: Bank deposits; Bank loans; Banking; Banking regulation; Banks; Checks; Economic models; Federal Reserve Bank; Free reserves; Interest rates; Loan defaults; Loan rates; Mathematical analysis; Microeconomics; Production functions; Regulation; Risk aversion; Service charges
• ISSN: 0038-4038; 2325-8012
• DOI: 10.2307/1058103

Like other productive enterprises, banks combine scarce resources to produce some output. Thus, bank behavior is a natural subject for the neoclassical theory of the firm. Unfortunately, most model builders have ignored the productive nature of the bank and have limited their analysis to narrow aspects of banking activity. Developed under different and often mutually exclusive sets of assumptions, these models are not ideal as side-by-side policy guides. Unlike these previous efforts, the model presented here incorporates the non-intermediary portion of banking activity, especially the clearance output production. Also considered are production function constraints and resource costs. Results of deposit rate regulation suggest that the bank portfolio mix depends on the interest rate paid on deposits. Also, prohibition of interest payment on transaction balances produces artificially low prices for check clearance services. Finally, the Federal Reserve can improve its control of the money supply by considering real, as well as financial, costs of credit expansion. Appendices.