Regulations and Productivity Growth in Banking: Evidence from Transition Economies

Abstract

This paper examines the relationship between the regulatory and supervision framework, and the productivity of banks in 22 countries over the period 1999-2009. We follow a semiparametric two-step approach that combines Malmquist index estimates with bootstrap regressions. The results indicate that regulations and incentives that promote private monitoring (PMON) have a positive impact on productivity. Restrictions on banks' activities relating to their involvement in securities, insurance, real estate, and ownership of nonfinancial firms also have a positive impact. Regulations relating to the first and second pillars of Basel II, namely, capital requirements (CAPR) and official supervisory power (SPR) do not have, in general, a statistically significant impact on productivity over the study period although they appear to gain in importance following the onset of the financial crisis in 2007. The latter finding indicates that stringent capital and supervisory standards have positive productivity effects when financial pressures peak. Our results are robust when controlling for various country-specific features and alternative estimation approaches.JEL codes: D24, G21, G28 THE IMPORTANT FUNCTIONS performed by banks and the implications for financial stability and economic growth have resulted in a heavily regulated and supervised industry. In many emerging markets international organizations such We would like to thank two anonymous referees and Robert DeYoung (Editor) for detailed and insightful comments that substantially improved previous versions of the paper. We also thank participant suggestions from the 2008 workshop "Fostering a European

Post-crisis regulatory reforms and bank performance: lessons from Asia

“…In addition they show that policies that enforce accurate information disclosure and private monitoring work best to enhance bank efficiency, whereas they find no evidence that capital requirements and official supervisory power improve bank performance. A voluminous literature supports the view that private monitoring contributes to the improvement of bank efficiency (Pasiouras et al, 2009;Haw et al, 2010;Delis et al, 2011), while only limited evidence exists that official supervisory oversight and capital requirements help improve financial intermediation (Pasiouras et al, 2009). In particular, Chortareas et al (2012) find that all forms of regulatory policy hamper the efficient operation of banks.…”

Integration, productivity and technological spillovers: Evidence for eurozone banking industries

“…The controversy relates also to the sources of productivity growth (via the relative importance in technological progress, scale or efficiency improvements). Finally, there is still only limited cross-country empirical evidence on what type of regulatory and supervisory reforms can promote bank productivity growth, while ensuring financial sector stability (Barth et al, 2004;Delis et al, 2011;Ayadi et al, 2016).…”

Liberalization, bankers’ motivation and productivity: A simple model with an application

“…There are alternative ways to measure bank inputs and output in the literature. Prominent ones are the production approach (Berger and Humphrey, 1992) and the intermediation approach (Sealy and Lindley, 1997;Aly et al, 1990;Delis et al, 2011). As in Wheelock and Wilson (1999), "a mutually exclusive distinction" between inputs and output is vital for modelling productivity, hence we follow the intermediation approach.…”

“…A strand of literature (Fare et al, 1994;Humphrey and Pulley, 1997;Wheelock and Wilson, 1999;Tirtiroglu et al, 2005;Pasiouras, 2008;Brissimis et al, 2009;Delis et al, 2011; to name but a few) examines bank efficiency and productivity following reforms and regulatory changes. They are panel as well as country-specific studies which mostly employ non-parametric data envelopment analysis (DEA) to compute various efficiency decompositions -technical efficiency, scale efficiency, efficiency change (catching up or falling behind) -and productivity growth.…”