Abstract The permanent income/transitory income distinction from consumption functions can be applied to cost functions. Transitory deviations of actual output from potential output, i.e., variations in capacity utilization, are relevant to the U-shaped average cost pattern found in econometric studies. Data from retail banks in Argentina are used to illustrate this issue, with the number of branches as a proxy for potential output, and product per branch as a proxy for the utilization level. Economies of scale at the plant level can be reinterpreted as an indication of excess capacity in the banking industry.