Financial liberalization, financial regulation and bank efficiency: a multi-country analysis

Abstract

This article investigates the impact of financial reforms on bank efficiency. More specifically, we distinguish between two different types of financial reforms, i.e. financial liberalization measures and measures of the quality of bank regulation and supervision (i.e. financial regulation), and study their relationship to bank efficiency separately. Moreover, we analyse whether the impact of financial liberalization on bank efficiency is conditional on the quality of regulation and supervision of the banking system. We apply stochastic frontier analysis to calculate bank efficiency at the individual bank level and use a new and detailed database that measures different aspects of financial reforms. The data-set consists of 87 312 bank-year observations covering 61 countries for the period 1996-2005. Overall, we show that the impact of financial liberalization policies on bank efficiency is conditional on the extent to which bank regulation and supervision has been adopted and developed.

The effect of earnings management on bank efficiency

“…By using cost efficiency, the results showed that well-developed institutions have significant effects on bank efficiency. The findings are also supported by Hermes and Meesters (2015). The authors sampled banks from over 61 countries for the 1996-2005 period to investigate the impact of financial reform on cost efficiency.…”

Financial openness, risk and bank efficiency: Cross-country evidence

“…Additionally, their results suggest that higher quality of home country institutions and higher similarity between home and host country institutional quality reduce foreign bank inefficiency. Hermes and Meesters (2015) examine the impact of financial liberalization on bank cost efficiency using a multi-country sample of banks covering 61 countries for the period 1996-2005. Employing a range of domestic and international liberalization measures, they report a positive association between financial liberalization and increased bank efficiency that hinges upon the quality of bank regulation and supervision.…”

Financial development, financial liberalization and social capital

“…Several studies have focused on the importance of effective bank regulation and supervision. Hermes and Meesters (2015) find that the impact of financial liberalization on bank efficiency is conditional on the quality of regulation and supervision of the banking system. This result is corroborated by a study from the Sahay et al (2015), which finds evidence that financial development is positively related to the quality of the regulatory framework, as measured by compliance with Basel Core Principles on banking supervision and the Insurance Core Principles for the insurance industry.…”

“…Factors that have been identified as prerequisites of successful financial liberalization are bureaucratic efficiency, a strong rule of law, proper contract enforcement, control over corruption and prudential regulation and supervision (Demirgüç-Kunt and Detragiache 1998;Summers 2000;Hermes and Meesters 2015).…”