Banking Regulations, Cost and Profit Efficiency: Cross-Country Evidence
University of Surrey - Surrey Business School; Technical University of Crete; Coventry University - Faculty of Business, Environment & Society; Centre for Financial and Risk Management, Audencia Nantes School of Management; Centre for Governance & Regulations
Sailesh K. Tanna
Technical University of Crete (TUC) - Department of Production Engineering and Management
March 1, 2008
International Review of Financial Analysis, 2009, 18 (5), 294-302
This paper uses stochastic frontier analysis to provide international evidence on the impact of the regulatory and supervision framework on bank efficiency. Our dataset consists of 2,853 observations from 615 publicly quoted commercial banks operating in 74 countries during the period 2000-2004. We investigate the impact of regulations related to restrictions on bank activities and the three pillars of Basel II on cost and profit efficiency of banks, while controlling for other country-specific characteristics. Our results suggest that regulations and incentives that enhance market discipline, and higher supervisory power of the authorities, increase both cost and profit efficiency. Stricter capital requirements have a positive impact on cost efficiency but negative impact on profit efficiency. We observe the opposite effect in the case of restrictions on bank activities, with higher restrictions having a negative influence on cost efficiency but positive influence on profit efficiency.
Number of Pages in PDF File: 34
Keywords: Banking, Efficiency, Regulations, Stochastic frontier analysis
JEL Classification: G21, G28, D2, C24Accepted Paper Series
Date posted: March 9, 2008 ; Last revised: September 28, 2012
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