The Effects of Bank Regulations, Competition, and Financial Reforms on Banks’ Performance
36 Pages Posted: 19 Feb 2010 Last revised: 9 Jul 2010
Date Written: February 17, 2010
In this paper, we examine the influence of bank regulation, concentration, and financial and institutional development on commercial bank margins and profitability across a broad selection of Middle East and North Africa (MENA) countries. We cover the 1989-2005 period and control for a wide array of macroeconomic, financial, and bank characteristics. The empirical results suggest that bank-specific characteristics, in particular bank capitalization and credit risk, have a positive and significant impact on banks’ net interest margin, cost efficiency, and profitability. As for the impact macroeconomic and financial development indicators bear on bank performance, we conclude that these variables have no significant impact on net interest margins, except for inflation. However, inflation shocks seem to be passed mainly through the deposit rates and this type of transmission means that banks bear the entire negative cost of inflation. Also, the results suggest that banks lower their operating costs in a well-developed banking sector environment (as confirmed by the negative and statistically significant coefficient of the bank development variable in the cost efficient regression models). Furthermore, the stock market development variable is always positive and significant in all specifications, suggesting that banks operating in a well-developed stock market environment tend to have greater profit opportunities. Regulatory and institutional variables seem to have an impact on bank performance as the results suggest that corruption increases the cost-efficiency and net-interest margins while an improvement of the law and order variable decreases the cost of efficiency without affecting performance.
Keywords: bank interest margin, bank profitability, dynamic panel data and MENA region
JEL Classification: E44, G21, L51
Suggested Citation: Suggested Citation