The impact of bank regulation on commercial bank performance evidence from South Africa

Tendai Gwatidzo

No 11064, Working Papers from South African Reserve Bank

Abstract: Using data on South Africas commercial banks in the period 20052018, this paper investigates the impact of bank regulation on bank performance. The study uses a fixed effects model to run the regression model as well as the data envelopment analysis approach to estimate efficiency scores. We find a number of interesting results. First, we find a negative relationship between capital stringency and bank performance, suggesting that increased capital requirements force banks to increase their reserves, adversely affecting their performance. Second, we find a positive relationship between activity restrictions and bank performance, indicating that this kind of regulation, which may well be good for the public, as argued by the public interest view of regulation, is also good for the regulated banks. Third, we find a negative and significant relationship between supervisory power and bank performance. Fourth, we find a positive and significant relationship between the market discipline index and bank performance, suggesting that by creating environments characterised by high market discipline, the regulatory regime enhances the ability and incentives of private investors to efficiently monitor banks. This ensures better management of banks, ultimately increasing profitability. Overall, the study finds that regulation matters for bank performance.

Date: 2024-06-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eff, nep-fdg and nep-reg
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