Do Bank Regulation, Supervision and Monitoring Enhance or Impede Bank Efficiency?
James R. Barth
Auburn University; Milken Institute
The University of Hong Kong - Faculty of Business and Economics
(马跃) Yue Ma
City University of Hong Kong (CityUHK) - Department of Economics & Finance
Zhongshan University - Department of Economics
Frank M. Song
The University of Hong Kong - School of Economics and Finance
March 21, 2010
The recent global financial crisis has spurred renewed interest in identifying those reforms in bank regulation that would work best to promote bank development, performance and stability. Building upon three recent world-wide surveys on bank regulation (Barth et al., 2004, 2006, and 2008), we attempt to contribute to this assessment by examining whether bank regulation, supervision and monitoring enhance or impede bank operating efficiency. Based on an unbalanced panel analysis of more than 4,050 banks observations in 72 countries over the time period 1999-2007, we find that tighter restrictions on bank activities are negatively associated with bank efficiency while greater capital regulation stringency is marginally and positively associated with bank efficiency. In addition, we find that a strengthening of official supervisory power is positively associated with bank efficiency only in countries with independent supervisory authorities. Moreover, independence coupled with a more experienced supervisory authority tends to enhance bank efficiency. Finally, market-based monitoring of banks in terms of more financial transparency is positively associated with bank efficiency.
Number of Pages in PDF File: 50
Date posted: March 28, 2010