Regulations and productivity growth in banking

Delis, Manthos D and Molyneux, Philip and Pasiouras, Fotios (2009): Regulations and productivity growth in banking.

Abstract

This paper examines the relationship between the regulatory and supervision framework and the productivity of banks in 22 countries over the period 1999-2006. We follow a semi-parametric two-step approach that combines Malmquist index estimates with bootstrap regressions. The results indicate that regulations and incentives that promote private monitoring have a positive impact on productivity. Restrictions on banks’ activities relating to their involvement in securities, insurance, real estate and ownership of non-financial firms also have a positive impact. However, regulations relating to the first and second pillars of Basel II, namely capital requirements and official supervisory power do not appear to have a statistically significant impact on productivity.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banks; Basel II; Productivity; Regulations
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Altunbas, Y., Liu, M.H., Molyneux, P., Seth, R., 2000. Efficiency and risk in Japanese banking. Journal of Banking and Finance 24, 1605-1626.

Altunbas, Y., Gardener, E.P.M., Molyneux, P., Moore, B., 2001. Efficiency in European banking. European Economic Review 45, 1931-1955.

Altunbas, Y., Carbo, S., Gardener, E.P.M., Molyneux, P., 2007. Examining the relationships between capital, risk and efficiency in European banking. European Financial Management 13, 49–70.

Altzinger, W., Petkova, I. (Eds). 2007. Impacts of foreign direct investments on banking sectors in South East European countries. Economic Policy Institute, Sofia.

Aysan, A.F., Ceyhan, S.P., 2008. What determines the banking sector performance in globalized financial markets? The case of Turkey. Physica A 387, 1593-1602.

Barth, J.R, Caprio, G. Jr., Levine, R., 2007a. The Microeconomic Effects of Different Approaches to Bank Supervision. In Haber S., North D., Weingast B., (Eds), The Politics of Financial Development, Stanford University Press.

Barth, J.R, Caprio, G. Jr., Levine, R., 2001b. The regulation and supervision of bank around the world: a new database. In: Litan, R.E., Herring, R., (Eds), Integrating Emerging Market Countries into the Global Financial System, Brookings-Wharton Papers in Financial Services, Brooking Institution Press, pp. 183-240.

Barth, J.R., Caprio, G. Jr, Levine, R., 2007b. Bank Regulations Are Changing: But for Better or Worse?, July, World Bank, available at: http://go.worldbank.org/SNUSW978P0

Barth, J.R., Caprio, G. Jr., Levine, R., 2004a. Bank regulation and supervision: what works best? Journal of Financial Intermediation 13, 205-248.

Barth, J.R., Gan, J., Nolle, D.E., 2004b. Global Banking Regulation and Supervision: What are the Issues and What Are the Practices?, In: Focus on Financial Institutions and Services, Nova Science Publisher.

Barth, J.R, Caprio G. Jr, Levine R., 2006. Rethinking Bank Regulation: Till Angels Govern, Cambridge University Press. Barth, J.R, Nolle, D.E, Phumiwasana, T., Yago, G., 2003a. A Cross-Country Analysis of the Bank Supervisory Framework and Bank Performance. Financial Markets, Institutions and Instruments 12, 67-120.

Barth, J.R., Caprio G. Jr., Levine, R., 2001a. Banking systems around the globe: Do regulations and ownership affect performance and stability? In: Mishkin F.S. (ed), Prudential Supervision: What works and What Doesn’t, University of Chicago Press, pp. 31-88.

Barth, J.R., Caprio G. Jr., Levine, R., 2003b. Bank regulation and supervision: Lessons from a new database. In: Garza J.A.M. (Ed), Macroeconomic Stability, Financial Markets, and Economic Development, Mexico, City: Banco de Mexico.

Barth, J.R., Caprio G. Jr., Levine, R., 2005. Rethinking Bank Regulation, Bank of England and Bank of Slovenia Conference on Small Countries, Big Markets Achieving Financial Stability in Small Sophisticated Markets, Ljubljana, Slovenia, October 28. Available at: http://www.bsi.si/library/includes/datoteka.asp?DatotekaId=947

Barth, J.R., Dopico, L.G., Nolle, D.E., Wilcox, J.A., 2002. Bank Safety and Soundness and the Structure of Bank Supervision: A Cross-Country Analysis. International Review of Finance 3, 163-188.

Beck, T., Demirguç-Kunt, A., Levine, R., 2000. A New Database on Financial Development and Structure. World Bank Economic Review 14, 597-605.

Beck, T., Demirguc-Kunt, A., Levine, R., 2006. Bank supervision and corruption in lending. Journal of Monetary Economics 53, 2131-2163.

Becker, G., 1983. A theory of competition among pressure groups for political influence. Quarterly Journal of Economics 98, 371-400.

Berger, A.N., 1995. The relationship between capital and earnings in banking. Journal of Money, Credit, and Banking 27, 432-456.

Berger, A.N., Klapper, L.F., Turk-Ariss, R., 2008. Banking Structures and Financial Stability, Mimeo.

Besanko, D., Kanatas, G., 1996. The Regulation of Bank Capital: Do Capital Standards Promote Bank Safety? Journal of Financial Intermediation 5, 160-183.

Bonin, J.P., Hasan, I., Wachtel, P., 2005. Privatization matters: Bank efficiency in transition countries. Journal of Banking and Finance 29, 2155-2178.

Brealey, R.A., Kaplanis, E.C., 1996. The determination of foreign banking location. Journal of International Money and Finance 15, 577–597.

Brissimis, S.N., Delis, M.D., Papanikolaou, N.I., 2008. Exploring the Nexus between Banking Sector Reform and Performance: Evidence from Newly Acceded EU Countries. Available at SSRN: http://ssrn.com/abstract=1129235

Calomiris, C.W., 1999. Building an incentive-compatible safety net. Journal of Banking and Finance 23, 1499-1519.

Caprio, G., Laeven, L., Levine, R, 2007. Governance and bank valuation. Journal of Financial Intermediation 16, 584-617.

Casu, B., Girardone, C., Molyneux, P., 2004. Productivity change in European banking: A comparison of parametric and non-parametric approaches. Journal of Banking and Finance 28, 2521-2540.

Claessens, S., Klingebiel, D., 2000. Competition and scope of activities in financial services. Mimeo. World Bank, Washington D.C., April.

Demirguc-Kunt, A., Detragiache, E., Tressel, T., 2008. Banking on the Principles: Compliance with Basel Core Principles and Bank Soundness. Journal of Financial Intermediation 17, 511-542.

Demirguc-Kunt, A., Detragiache, E., 2002. Does deposit insurance increase banking system stability? An empirical investigation. Journal of Monetary Economics 49, 1373-1406.

Demirguc-Kunt, A., Laeven, L., Levine, R., 2004. Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation. Journal of Money, Credit and Banking 36, 593-622.

Dermiguc-Kunt, A., Huizinga, H., 2004. Market discipline and deposit insurance. Journal of Monetary Economics 51, 375-399.

Djankov, S., La Porta, R., Lopez-de-Silanes, F., Shleifer, A., 2002. The regulation of entry. Quarterly Journal of Economics 117, 1-37.

Dogan, E., Fausten D.K., 2003. Productivity and Technical Change in Malaysian Banking: 1989-1998. Asia-Pacific Financial Markets 10, 205-237.

Duarte, J., Han, X., Harford, J., Young, L., 2008. Information asymmetry, information dissemination and the effect of regulation FD on the cost of capital. Journal of Financial Economics 87, 24-44.

Evanoff, D.D., Wall, L.D., 2000. A subordinated debt as bank capital: a proposal for regulatory reform. Economic Perspectives, Federal Reserve Bank of Chicago, 40-53.

Färe, R., Grosskopf, S., W.L.Weber, W.L., 2004. The effect of risk-based capital requirements on profit efficiency in banking. Applied Economics 36, 1731 - 1743

Fernandez, A.I., Gonzalez, F., 2005. How accounting and auditing systems can counteract risk-shifting of safety-nets in banking: Some international evidence. Journal of Financial Stability 1, 466-500.

Fries, S., Taci, A., 2002. Banking reform and development in transition countries. European Bank for Reconstruction and Development Working Paper No. 71.

Fries, S., Taci, A., 2005. Cost efficiency of banks in transition: Evidence from 289 banks in 15 post-communist countries. Journal of Banking and Finance 29, 55-81.

Gonzalez, F., 2005. Bank regulation and risk-taking incentives: An international comparison of bank risk. Journal of Banking and Finance 29, 1153-1184.

Grifell-Tatje, E., Lovell, C.A.K. 1996. Deregulation and productivity decline: the case of Spanish savings banks, European Economic Review, 40 ,1281-303

Haselmann, R., Wachtel, P., 2007. Risk taking by banks in the transition countries. Comparative Economic Studies 49, 411–429

Hay, J.R., Shleifer, A., 1998. Private Enforcement of Public Laws: A Theory of Legal Reform. American Economic Review Papers and Proceedings 88, 398-403.

Herring, R., 2005. Implementing Basel II: Is the Game Worth the Candle? Financial Markets, Institutions & Instruments 14, 267-287.

Hughes, J.P., Mester, L., 1998. Bank capitalization and cost: Evidence of scale economies in risk management and signaling. Review of Economics and Statistics 80, 314-325.

Hughes, J.P., Mester, L.J., Moon, C-G., 2001. Are scale economies in banking elusive or illusive? Evidence obtained by incorporating capital structure and risk-taking into models of bank production. Journal of Banking and Finance 25, 2169–2208.

Hughes, J.P., Moon, C., 1995. Measuring bank efficiency when managers trade return for reduced risk. Department of Economics Rutgers University Working Paper, No. 1995-20

Isik, I., 2007. Bank ownership and productivity developments: evidence from Turkey. Studies in Economics and Finance 24, 115-139.

Kasman, A., Yildirim, C., 2006. Cost and profit efficiencies in transition banking: the cased of new EU members. Applied Economics 38, 1079-1090.

Kazandjieva, I., 2007. Management Practices Generated by Foreign Banks Entry. In: Altzinger, W., Petkova, I. (Eds), Impacts of foreign direct investments on banking sectors in South East European countries. Economic Policy Institute, Sofia.

Khan, S., Lewbel, A., 2007. Weighted And Two-Stage Least Squares Estimation Of Semiparametric Truncated Regression Models. Econometric Theory 23, 309-347.

Kopecky, K.J., VanHoose, D., 2006. Capital regulation, heterogeneous monitoring costs, and aggregate loan activity. Journal of Banking and Finance 30, 2235-2255.

Lensink, R., Hermes, N., 2004. The short-term effects of foreign bank entry on domestic bank behaviour: Does economic development matter? Journal of Banking and Finance 28, 553-568.

Levine, R.,1996. Foreign banks, financial development, and economic growth. In: Claude EB, (Ed). International Financial Markets, Washington, DC: AEI Press.

Levine, R., 2003. Bank Supervision, Corporate Finance, and Economic Development, Conference on Economics, Political Institutions, and Financial Markets: Institutional Theory and Evidence from Europe, the United States, and Latin America, February 7-8, Stanford University. available at: http://sshi.stanford.edu/Conferences/2002-2003/Finance2003/levine_paper.pdf

Maechler, A.M., Mitra, S., Worrell, D., 2007. Decomposing Financial Risks and Vulnerabilities in Eastern Europe. International Monetary Fund Working Paper 07/248.

Mukherjee, K., Ray, S.C., Miller, S.M., 2001. Productivity growth in large US commercial banks: The initial post-deregulation experience. Journal of Banking and Finance 25, 913-939.

Pasiouras, F., 2008. International evidence on the impact of regulations and supervision on banks’ technical efficiency: an application of two-stage data envelopment analysis. Review of Quantitative Finance and Accounting 30, 187-223.

Pasiouras, F., Gaganis, C., Zopounidis, C., 2006. The impact of bank regulations, supervision, market structure, and bank characteristics on individual bank ratings: A cross-country analysis. Review of Quantitative Finance and Accounting 27, 403-438.

Patricia, J., Furfine, C., Groeneveld, H., Hancock, D., Jones, D., Perraudin, W., Radecki, L., Yoneyama, M., 1999. Capital requirements and bank behaviour: The impact of the Basle Accord. Basle Committee on Banking Supervision, Working Paper No. 1, April.

Santos, J.A.C., 1999. Bank capital and equity investment regulations. Journal of Banking and Finance 23, 1095-1120.

Santos, J.A.C., 2001. Bank Capital Regulation in Contemporary Banking Theory: A Review of the Literature. Financial Markets, Institutions and Instruments 10 (2), 41-84.

Simar, L., Wilson, P.W., 2007. Estimation and inference in two-stage, semi-parametric models of production processes. Journal of Econometrics 136, 31-64.

Stigler, G., 1971. The theory of economic regulation. Bell Journal of Economics and Management Science 2, 3-21.

Stiroh, K.J., 2004. Diversification in banking: Is noninterest income the answer? Journal of Money, Credit and Banking 36, 853-82

Thakor, A.V., 1996. Capital Requirements, Monetary Policy, and Aggregate Bank Lending: Theory and Empirical Evidence. Journal of Finance 51, 279-324.

Tirtiroglu, D., Daniels, K.N., Tirtigoglu, E., 2005. Deregulation, Intensity of Competition, Industry Evolution, and the Productivity Growth of U.S. Commercial Banks. Journal of Money, Credit and Banking 37, 339-360.

Totev, D., 2007. Banking Law Perspective: Regulatory Challenges and Implications of the Basel Core Principles and Basel II. In: Altzinger, W., Petkova, I. (Eds), Impacts of foreign direct investments on banking sectors in South East European countries. Economic Policy Institute, Sofia.

VanHoose, D., 2007. Theories of bank behaviour under capital regulation. Journal of Banking and Finance 31, 3680-3697.

Worthington, A.C., 1999. Malmquist indices of productivity change in Australian financial services. Journal of International Financial Markets, Institutions and Money 9, 303-320.