The effect of market structure, regulation, and risk on banks efficiency

Abstract

Purpose-The purpose of this paper is to analyze the efficiency performance of the Gulf Cooperation Countries (GCC) banking sector. The primary focus is to assess whether market power, risk taking activities, and regulations have significant effects on GCC banks' efficiency performance. Design/methodology/approach-The estimation and inference has been implemented using a double bootstrap procedure that simultaneously corrects for bias and validates inference on the influence of covariates. In the first stage, efficiency scores are estimated with data envelopment analysis (DEA). In the second stage, variation in the resulting efficiency scores is explained using a truncated regression model with inference based on a semi-parametric bootstrap routine. Findings-The authors found compelling evidence that efficiency is not independent of the market structure, the bank's risk taking activities, and the regulatory environment. In particular, the Lerner Index provides evidence that market power decreases efficiency. The capital adequacy, the supervisory power and the market discipline were all found to improve efficiency. Additionally, when the risk is measured by the Z-Score or even by the ratio of non-performing loans to total loans, it adversely affects efficiency. Research limitations/implications-The results of the current study have important implications for regulators and supervisors. Promoting banks' competitive environment in the GCC countries through reducing the information barriers to entry, encouraging bank privatization, and lowering the activities restrictions can potentially improve operational efficiency of banks. Also enhancing banks' diversification activities and risk management techniques may have the advantage of increasing operational efficiency. Furthermore, improvements in the regulatory conditions that enhance banking supervision and monitoring would also improve efficiency. Originality/value-The main contributions of the paper are threefold: first, to the knowledge, this study is the first to employ by far the most comprehensive data set of GCC banks investigated to date. Second, the analysis focusses on the influence of a wide set of factors, most of them was not covered before in related economic literature on bank efficiency of the GCC countries. Third, the methodological innovation involves applying a double bootstrap procedure proposed by Simar and Wilson (2007).

Selected Firm Characteristics and Financial Intermediation Efficiency of Deposit Taking Saving and Credit Co-Operative Societies in Kenya

“…On profitability, the results showed a positive (ß=1.1541) significant (p=0.0029<0.05) relationship between profitability and intermediation efficiency. The findings corroborate those by Arora (2014), Maghyereh and Awartani (2014), Alrafadi, Kamaruddin and Yusuf (2014), Othman, et al, (2014), Srairi (2010) and Sufian (2009). However, Gulati (2015) found negative relationship.…”

“…On diversification, the results revealed a negative (ß= -0.3441) significant (p=0.0147<0.05) between income diversification and intermediation efficiency. The empirical results are consistent with those of Elyasiani and Wang (2012) and Huang and Chen (2006) but contradict those of Maghyereh and Awartani (2014) and Sufian (2009). The inverse relationship implies that income diversification hurts efficiency through more idiosyncratic risk and decreased incentives to monitoring.…”

Do oil and gas price shocks have an impact on bank performance?

“…To maintain the confidence level in the financial system, the governments in Kuwait and the UAE moved to guarantee deposits. Dubai's debt crisis and the default of the two larger business groups (Saad and Al Gosaibi) in Saudi Arabia are indicative of the potential problems that arose in the GCC banking sector(Maghyereh and Awartani, 2014) after the global financial crisis.…”

Market Concentration, Risk-taking, and Efficiency of Commercial Banks in Pakistan: An Application of the Two-Stage Double Bootstrap DEA

“…The truncated regression gives evidence of an insignificant relationship between credit risk and the efficiency. Credit risk (non-performing loans) has always been highlighted as a negative factor affecting the efficiency of banks (Maghyereh & Awartani, 2014). If the reserve for non-performing loans is high, this will negatively affect bank efficiency.…”

“…This development has transformed the traditional role of banking institutions from raising and utilizing funds to the management of risks and surviving amidst cut-throat competition (Bonin, Hasan, & Wachtel, 2005;Ghosh, 2015;Huang, Chiang, & Tsai, 2015). In addition, the outbreak of the banking crisis of 2007-2008 confirmed the inseparable relationship of financial institutions and risks while also stimulating banks to review their performance and efficiency (De Haan & Poghosyan, 2012;Maghyereh & Awartani, 2014). The current situation amplifies the need for understanding bank efficiency in more subtle detail.…”