How consistent are measures of financial liberalization in assessing its impact on bank cost efficiency? A cross–country empirical analysis

Glauco Vita, Sailesh Tanna and Yun Luo ()
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Glauco Vita: Coventry University
Sailesh Tanna: Coventry University
Yun Luo: University of Southampton

Journal of Business Economics, 2024, vol. 94, issue 9, No 2, 1169-1199

Abstract: Abstract Using a sample of commercial bank–year observations covering 104 countries over the 1999–2017 period, we consider five contemporary de jure and de facto indicators of financial liberalization to provide a comparative assessment of their impact on bank cost efficiency. With the sole exception of one de jure index, all other financial liberalization measures consistently indicate an improvement in cost efficiency. We also compare the effects before and after the 2007 global financial crisis, which instigated a policy shift from deregulation to prudential re–regulation. We find that prudential re–regulation did not detrimentally affect bank cost efficiency. Our results for the main financial liberalization measures hold irrespective of countries’ stage of economic development and prove robust to re–estimations based on a single-country efficiency frontier for the US, alternative model specifications and methodologies that account for endogeneity and cross section dependence. The key policy implication from our findings is that prudential policies aimed at fostering stability and less bank risk–taking, can be pursued without any risks of hindering financial intermediation and lowering bank cost efficiency.

Keywords: Financial liberalization; Prudential re–regulation; Financial openness; Financial integration; Bank cost efficiency (search for similar items in EconPapers)
JEL-codes: C49 D24 F36 G21 G28 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11573-024-01195-7

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