Regulations, supervision and banks’ cost and profit efficiency around the world: a stochastic frontier approach

This paper uses stochastic frontier analysis and Tobit regressions to provide international evidence on the impact of regulatory, supervision and environmental factors on bank efficiency. Our contribution is twofold. First, we use a newly constructed database of 3,086 observations from 677 publicly quoted commercial banks operating in 88 countries to provide cross-country evidence on the determinants of banks’ cost and profit efficiency during the period 2000-2004. Second, we utilise the new database of the World Bank (WB), developed by Barth et al. (2004b), to investigate the impact of a broad range of regulatory and supervision measures, including capital requirements, restrictions on bank activities, private monitoring, official supervisory power of the authorities, and deposit insurance. Our results suggest a robust association of some of these measures with bank efficiency, despite being marginal in their impact compared to the influence of bank level capitalisation. We also reveal, in this context, some similarities and differences in the determinants of cost and profit efficiency, with plausible effects of the impact of the conditioning environmental factors on bank efficiency.