The Two Product Banking Firm Under Uncertainty

Abstract

The purpose of this paper is to develop a model of bank production and costs which removes the aforesaid deficiencies. In particular: a) in this model the neoclassical theory of the firm is applied to banks as a particular case, b) the non-intermediary portion of banking activity, namely the clearance output production, as well as resource costs and production function constraints are incorporated, and c) different aspects of bank behavior are integrated into a unified microeconomic framework and a set of simultaneous policy implications are derived. These implications are then contrasted to those of the existing models.