Banking Regulations, Cost and Profit Efficiency: Cross-Country Evidence

Abstract:     
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, C24

Accepted Paper Series