Impact of Banking Supervision on the Cost-Efficiency of Banks: A Study of Five Developing Asian Countries

Abstract

The main purpose of banking supervision is to ensure stable banking operations, minimize the risk to the stability of financial systems, increase banking efficiency, and promote competitiveness. However, the question is whether, and how, banking supervision benefits or damages banking efficiency. The purpose of this study is to investigate the different effects of financial regulations on the cost-efficiency of the banking industries in India, Thailand, Bangladesh, Malaysia, and Mongolia, by employing the stochastic frontier approach (SFA) and stochastic metafrontier function (SMF) for a sample of 141 commercial banks between 2000 and 2010. The findings show that bank efficiency is not significantly influenced by the minimum capital requirements; however, higher capitalization helps to alleviate agency problems between managers and shareholders, and gives shareholders greater incentives to monitor management's performance and ensure that their banks operate efficiently. Finally, for banking supervision in the five countries, SMF is estimated under the metafrontier cost function, whether a technology gap ratio (TGR) or meta-cost efficiency (MCE). It is revealed that Indian banks have the best results with TGR and MCE at 0.7527 and 0.6715, respectively, while Thailand has the lowest TRG value at 0.4608 and Malaysia the lowest MCE value at 0.3531. Contribution/Originality: This study is one of very few that has investigated how banking supervision benefits or damages banking efficiency in developing Asian countries. Instead of programming techniques, we applied SMF proposed by Huang et al. (2014) to obtain the estimates of the metafrontier. We found that banking efficiency is not significantly influenced by capital regulations, but that higher capital ratios are related to greater efficiency.