The role of capital regulation on bank performance

Ayadi, Nesrine; ne, YounÁ s BoujÁ lbÁ

doi:10.1504/ijmfa.2014.065239

Cited by 6 publications

(5 citation statements)

References 54 publications

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“…The only exception is for supervisory independence, which has a negative and statistically significant impact on financial stability. The results are in line with findings from several previous studies (Aiyar et al , 2014; Ayadi and Boujèlbène, 2014; Beck et al , 2006; Djankov et al , 2002). In fact, these results suggest that powerful regulation and supervision are likely to lead to corruption in lending which impedes banking stability in developing countries.…”

Section: Discussionsupporting

confidence: 93%

“…Nevertheless, considering moral hazard and asymmetries of information in the banking industry, banks might have motives to increase risk when asked to respond to stricter capital requirements to keep their desired leverage. As for the banking supervision, the main point when measuring supervisory effectiveness is sanctions and on-site audits as well as the impact on the level of bank risk (Delis and Staikouras, 2011; Ayadi and Boujèlbène, 2014).…”

Section: The Literature Reviewmentioning

confidence: 99%

“…Aiyar et al (2014) indicate that greater capital regulation stringency may be costly for society as it implies higher funding costs for banks, which lead them to cut back on lending. Moreover, Ayadi and Boujèlbène (2014) claim that capital regulation has a negative and statistically significant impact on banks risk-taking. By contrast, Admati and Hellwig (2014) and Admati et al (2013) found that higher standards of capital regulation are required for ensuring bank stability.…”

Section: The Literature Reviewmentioning

confidence: 99%

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Does the speed of adjustment in regulation and supervision affect financial stability in developing countries?

Azmeh

2019

JFRC

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Purpose This paper aims to examine the impact of bank regulation and supervision on financial stability. Financial sector reform, especially in developing countries, takes the form of a sudden adjustment in regulation and supervision. The main objective of the paper is to examine whether this fast and sudden adjustment in regulation and supervision has an undesirable impact on financial stability. Furthermore, the paper examines the role of real economic development in determining the impact of financial reform on financial stability. Design/methodology/approach Empirically, on a sample of 57 developing countries over the period 2000-2013, the author explored the impact of bank regulation and supervision on financial stability for different sub-groups of countries. The division is based on the real level of economic development and, most importantly, on the speed of adjustment in regulation and supervision. The study uses the cross-sectional–ordinary least square model. Each country has three observations (average 2000-2004, average 2005-2008 and average 2009-2013), which are convenient, with the date of the three surveys on regulation and supervision (2002-2006-2011). The period of the averages is selected to cover periods before and after the survey as regulation and supervision may be adopted before the survey and as its impact may persist for the period after. Findings The major finding of this study is that it supports the important role of the speed of adjustment in regulation and supervision, and its impact on financial stability. Soft adjustment in regulation and supervision has more positive impact on financial stability than fast adjustment. Activity restrictions have positive and significant impact on financial stability in soft adjustment countries’ group. On the other hand, in countries with fast adjustment, results show negative and statistically significant impact on financial stability, especially for supervisory independence. More time is needed for supervisors to adapt to new regulation and supervision and gain expertise to monitor financial condition of banks in a consistent manner. Results also show that the level of economic development is an important factor when testing the impact of regulation and supervision on financial stability. In lower income countries, more room is available for corruption in lending, which has a negative impact on financial stability. Practical implications This study advocates the necessity of taking the speed of adjustment in regulation and supervision by policymakers in developing countries, while initiating reform in the financial sector. Financial sector reform that takes the form of a sudden adjustment in regulation and supervision may have undesirable results in terms of financial stability. On the other hand, soft adjustment in regulation and supervision, which gives more room for supervisors to adapt and gain expertise, may have more positive impact on financial stability. Originality/value This paper is the first paper to explore new methods of calculating the speed of adjustment in regulation and supervision, and to examine whether the high speed of financial reform in developing countries has an undesirable impact on financial stability.

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Section: Discussionsupporting

confidence: 93%

Section: The Literature Reviewmentioning

confidence: 99%

Section: The Literature Reviewmentioning

confidence: 99%

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Does the speed of adjustment in regulation and supervision affect financial stability in developing countries?

Azmeh

2019

JFRC

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“…So strict capital requirements will increase cost efficiency and reduce profit efficiency. Ayadi and Boujelbene (2014) support the moral hazard hypothesis, and argue that capital regulation will reduce bank performance and strengthen financial institutions' liquidity risk management is critical to financial stability.…”

Section: Literature and Reviewmentioning

confidence: 83%

Regulation, Competition and Bank Risk: Evidence from China

Liu¹

2017

ABR

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This paper uses the semi-annual data of 16 listed banks from the fourth quarter of 2005 to the second quarter of 2016 as the research sample to study the impact of supervision and competition on the listed bank's risk in China. The results show that the higher level of bank holdings (capital adequacy ratio and core capital adequacy ratio) can significantly reduce the combined risk of banks and increase bank stability. Increased liquidity (liquidity ratio and deposit-loan ratio) can reduce bank risk, but this effect is not significant. The more fierce competition among banks (the smaller CR) will not only increase the proportion of weighted risk assets in total assets, but also increase the bank's bankruptcy probability and reduce the overall operating stability of the bank. It is necessary for authorities of policy to strengthen supervision of banking industry, especially the capital adequacy ratio and core capital adequacy ratio regulation and keep the competition of banks under the appropriate interval. It is also necessary for regulators to comply with the latest regulations of Basel III to set up more reasonable liquidity regulatory indicators to meet liquidity risk management.

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“…During this time, the following information was gathered: net profits (thousands PLN), return on assets (ROA; %), return on equity (ROE; %), cost to income (C/I), nonperforming loans (NPL; %), total capital ratio (TRC; %), balance totals (thousands PLN), total own funds (thousands PLN), total deposits (thousands PLN) and total credits (thousands PLN). This set of variables was important in the case of assessing the banks' performance and its stability [24].…”

Section: Methodsmentioning

confidence: 99%

The Determinants of Cooperative Banks’ Community Service—Empirical Study from Poland

et al. 2020

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This research concentrated on the socio-financial qualities of Poland’s co-op banking. The study’s results enabled answering the question of whether the cooperative banks (co-op banks) are exclusively focused on maximum financial effectiveness or faithful to the idea of cooperation, which basically means supporting its membership and community development. The main objective of the study was to determine the influence of internal factors on initiated support to the community within the framework defining the activities pertaining to a business’s social responsibility, as seen for Poland’s co-op banks. A seven-year study period was adopted, i.e., 2011–2017, inclusive. The research indicated that the co-op banks decide about a sum of contributions for community initiatives based on their current condition—according to current profits, current credits volume, total accounts number and considering financial security as expressed by the level of the solvency coefficient of the previous year.

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The role of capital regulation on bank performance

Cited by 6 publications

References 54 publications

Does the speed of adjustment in regulation and supervision affect financial stability in developing countries?

Does the speed of adjustment in regulation and supervision affect financial stability in developing countries?

Regulation, Competition and Bank Risk: Evidence from China

The Determinants of Cooperative Banks’ Community Service—Empirical Study from Poland

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