Size matters:analyzing bank profitability and efficiency under the Basel III framework

The latest regulatory framework,which has been introduced globally in the form of Basel III,and its implementation in the legislation of the member states of the Euro-pean Union has generated much interest in the impact of regulation on the efficiency and profitability of banks.This study aims to examine the impact of the introduction of two major regulatory changes(Basel II and Basel III)on bank performance,in terms of bank size and bank-specific and macroeconomic variables.A two-stage empirical anal-ysis was conducted on a sample of 433 European commercial banks over the 2006–2015 period.In the first stage,relative efficiency was calculated using non-parametric data envelopment analysis.In the second stage,the generalized method of moments was used to examine the impact of bank-specific and macroeconomic variables as well as regulation on bank performance,that is,profitability and efficiency.Consider-ing bank size,the results show a diverse impact of regulation on bank performance.Regarding large-and medium-sized banks,regulation positively affects both efficiency and profitability,whereas,for small banks,it negatively affects performance.The results suggest that larger banks have skillfully adapted to the new regulatory environment.In contrast,small banks have problems with profitability and efficiency because the new regulatory framework has imposed additional administrative and regulatory burdens.This could result in future failure or mergers with larger banks,resulting in a higher concentration in the banking sector and increased systemic risk.Our results strongly suggest that regulation should not be implemented equally for all banks;that is,on a one size fits all terms.A distinction between small and large banks when introducing new regulatory frameworks should be made if a reasonable level of competition is to be preserved.

A Comprehensive Analysis of the Effects of Capital Regulation and Heterogeneity on Bank Efficiency

This article analyzes the impact of capital regulation on bank efficiency using panel data from 165 commercial banks in China from 2013 to 2019.The results indicate that cost efficiency changes slightly and profit efficiency fluctuates greatly.Under the pressure of capital regulation,the profit efficiency of commercial banks with sufficient capital improves,while profit efficiency of banks with insufficient capital decreases slightly,and the cost efficiency of all commercial banks increases.Based on the heterogeneity analysis of banks,it is found that the cost efficiency and profit efficiency of different types of commercial banks differ significantly in response to capital regulation.

A Nonparametric and Aggregation Theoretic Approach for Measuring Productivity of US Banks during 2006-2016

Existing literature related to efficiency measurement and productivity analysis of banks is swarmed with the input-output classification of banks based on using accounting conventions. This usage varies from paper to paper. No two research papers are in consensus as to which classification should be used. This present work, however, uses the input-output classification of banks based on Barnett’s generalized model of production for financial intermediaries originally proposed in Barnett (1987) [1]. This model is based on economic theory definitions of inputs and outputs of a bank. Using this classification, the paper applies Data Envelopment Analysis to US banks during 2006-2016. This new methodology seeks to resolve and fix the issue of lack of consensus regarding which inputs and outputs to use for productivity analysis of banks. Furthermore, a standardized way of measuring productivity across banks is developed which can be used all over the world. This is accomplished by using the Malmquist Index of Productivity which is a tool used under Data Envelopment Analysis. The paper further establishes the connection of this tool with Barnett’s generalized model of production for financial intermediaries. Results indicate very high efficiency levels for US banks even post financial crisis. The reason for this performance is the cleansing of the financial system as unhealthy banks either left the scene or were merged. Better risk management, cost management and efficiency of structure of funding are some other reasons for high efficiency.

Does Property Rights Reform Improve the Efficiency of China's State-owned Banks?

China ＂s state-owned banks have undergone radical changes over the past two decades, including partial privatization and listing in both the Hong Kong Stock Exchange and the Shanghai Stock Exchange. This paper evaluates the effects of these changes by analyzing the efficiency of Chinese banks over the period 1998-2012 using two frontier techniques and comparative analysis. The findings suggest that the performance and technical efficiency of the Big Four banks improved considerably after property rights reform, but this improvement is not sufficient to keep the banks at the production frontier. Tobit regressions confirm that static ownership effects are negative but that the property rights reform has had significant and positive effects on the technical efficiency of state-owned commercial banks. GDP growth and the financial crisis have had positive effects on the efficiency of Chinese banks, which is more significant for joint stock commercial banks than state-owned commercial banks. The results indicate the value of ownership reforms of state-owned asset management companies and insurance companies and the establishment of a countercyclical capital buffer.

Navigating the Impact of Globalization on Bank Efficiency in China

The paper provides for the first time empirical evidence on the impact of economic globalization on bank efficiency in a developing economy. Using the data envelopment analysis method, we compute the efficiency of the Chinese banking sector during 2000- 2002 The empirical findings suggest that the inefficiency of the Chinese banking sector stems largely from scale rather than pure technical inefficiencies. Examining different components of economic globalization, we find that greater economic integration through higher trade flows, cultural proximity and political globalization have significant andpositive influence on bank efficiency levels. The empirical findings suggest that liberalization （restrictions） of the capital account exerts a negative （positive） influence on bank efficiency levels in China.

What Drives Cost Efficiency of Banks in China？

This study uses stochastic frontier analysis to examine the factors that influenced cost efficiency of banks in China from 2005 to 2013. The results indicate that policy variables, such as the reserve requirement ratio, the interest rate spread and open market operations by the People＇s Bank of China, are effective in improving the cost efficiency of banks, but shadow banking variables may reduce cost efficiency. Among the various bank types, city commercial banks appear to be the most efficient and foreign banks are the least efficient. The present study suggests that policy-makers can have a positive influence on bank cost efficiency by adjusting macro policy variables on different types of banks and by requiring more information on the shadow banking activities to improve monitoring.