The impact of capital regulation on banks' cost and profit efficiency under stressful economic conditions

: cross-country evidence

Abstract

This thesis evaluates how regulation on capital requirements is associated with cost and profit efficiency of banks. It allows an international comparison on banking regulation, capturing changes on public policies towards banks over time further, it encompasses one of the major financial crises since 1929. The impact of regulatory capital requirements on banking efficiency is assessed using the stochastic frontier production function for panel data to estimate inefficiency effects. It is used a panel dataset of 865 observations from 156 publicly listed commercial banks operating in 30 countries and covering a nine year time-horizon (2004-2012). Besides the impact on capital regulation, we also controlled for the influence of other regulatory variables, macroeconomic conditions, market structure characteristics and the state of financial development. Our results suggest that capital requirements negatively affect inefficiency, meaning that, for our sample, an increase on regulatory equity ratios will lead to an efficiency improvement. Regarding other regulatory control variables, we would say that regulation should aim to increase market discipline, while restricting banks activities. The power of supervisory agencies seems to negatively impact banks’ efficiency, but in in stressful conditions, it may help banks being more cost efficient.

Date of Award	13 Feb 2015
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)