Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation

65 Pages Posted: 31 Jul 2003

See all articles by Asli Demirgüç-Kunt

Asli Demirgüç-Kunt

World Bank

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Ross Levine

Stanford University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 22, 2003

Abstract

This paper examines the impact of bank regulations, market structure, and national institutions on bank net interest margins and overhead costs using data on over 1,400 banks across 72 countries while controlling for bank-specific characteristics. The data indicate that tighter regulations on bank entry and bank activities boost the cost of financial intermediation. Inflation also exerts a robust, positive impact on bank margins and overhead costs. While concentration is positively associated with net interest margins, this relationship breaks down when controlling for regulatory impediments to competition and inflation. Furthermore, bank regulations become insignificant when controlling for national indicators of economic freedom or property rights protection, while these institutional indicators robustly explain cross-bank net interest margins and overhead expenditures. Thus, bank regulations cannot be viewed in isolation; they reflect broad, national approaches to private property and competition.

Keywords: banks, regulation, policies, institutions, concentration, interest margins

JEL Classification: G21, G28, O16

Suggested Citation

Demirgüç-Kunt, Asli and Laeven, Luc A. and Levine, Ross, Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation (July 22, 2003). Available at SSRN: https://ssrn.com/abstract=427200 or http://dx.doi.org/10.2139/ssrn.427200

Asli Demirgüç-Kunt

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ross Levine

Stanford University ( email )

Stanford, CA 94305
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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