Financial Supervision and Bank Profitability: Evidence from East Asia
DOI:
https://doi.org/10.6000/1929-7092.2014.03.19Keywords:
Supervision, Bank Regulation, Bank Profitability.Abstract
The growing fragility of the financial system has led to the increasing importance of financial supervision's role. In particular, the financial supervision regime is expected to promote bank performance and maintain financial stability. Unfortunately, studies on the relationship between banking supervisory regimes and bank performance are still limited. To address this issue, this paper focuses on the following four aspects of banking supervision:(i) the structure of supervisory frameworks, (ii) the independence of supervisory institutions (iii) the scope of supervisory role; and (iv) the authority of central banks in the banking sector. We use country-specific data for seven East-Asian countries and data for 39 individual banks in those countries over the period of 2006–2011 to examine how different financial supervision regimes in the region influence bank performance. The results show strong evidence that the existence of a single bank supervisor, instead of multiple, will enhance bank profitability. Mean while, there is a mixed result regarding the role of central bank independence in improving bank profitability. Furthermore, the authority of central banks in the banking sector and the scope of bank supervision do not show strong relationship with bank performance.
References
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Peek, J., E.S. Rosengern, and G.M.B. Tootell. 1999. “Is Bank Supervision Central to Central Banking?” The Quarterly Journal of Economics. 114(2):629–653.
http://dx.doi.org/10.1162/003355399556098
Pellegrina, L.D., and D. Masciandaro. 2008. “Politicians, Central Banks and the Shape of Financial Supervision Architectures.” Journal of Financial Regulation and Compliance.16(4): 290–317.
http://dx.doi.org/10.1108/13581980810918387
Quintyn, M., and M.W. Taylor. 2002. Regulatory and Supervisory Independence and Financial Stability. IMF Working Paper Series WP/02/46
Arnone, M., B.J. Laurens, J. Segalotto, and M. Sommer. 2007. Central Bank Autonomy: Lessons from Global Trend. IMF Working Paper Series WP/07/88.
Barth, J.R., Caprio Jr., G., and R. Levine. 2001. The Regulation and Supervision of Banks around the World: A New Database. World Bank Policy Research Working Paper No. 2588.
__________. 2004. “Bank Regulation and Supervision: What Works Best? ”Journal of Financial Intermediation.13:205–248.
http://dx.doi.org/10.1016/j.jfi.2003.06.002
__________. 2006. Rethinking Bank Regulation: Till Angels Govern. Cambridge, UK : Cambridge University Press.
__________. 2008. Bank Regulations are Changing: For Better or Worse? World Bank Policy Research Working Paper No. 4646.
Barth, J.R., L.G. Dopico, D.E. Nolle, and J.A. Wilcox. 2002. “Bank Safety and Soundness and the Structure of Bank Supervision: A Cross-country Analysis.” International Review of Finance.3(3–4):163–188.
http://dx.doi.org/10.1111/j.1369-412X.2002.00037.x
Barth, J.R., C. Lin, Y. Ma, J. Seade, and F.M. Song. 2013. “Do Bank Regulation, Supervision and Monitoring Enhance or Impede Bank Efficiency.” Journal of Banking and Finance. 37(8):2879– 2892.
http://dx.doi.org/10.1016/j.jbankfin.2013.04.030
Barth, J.R., D.E. Nolle, T. Phumiwasana, and G. Yago. 2003. “A Cross-country Analysis of the Bank Supervisory Framework and Bank Performance.” Financial Markets, Institutions and Instruments. 12(2):67–120.
http://dx.doi.org/10.1111/1468-0416.t01-2-00001
Beck, T., A. Demirgüç-Kunt, and R. Levine. 2003. Bank Supervision and Corporate Finance. National Bureau of Economic Research Working Paper No. 9620.
Briault, C. 2002. Revisiting the Rationale for a Single National Financial Services Regulator. Financial Services Authority Occasssional Paper Series, No. 16.
Claessens, S., A. Demirgüç-Kunt, and H. Huizinga. 2001. “How does Foreign Entry Affect Domestic Banking Markets?” Journal of Banking and Finance.25(5):891–911.
http://dx.doi.org/10.1016/S0378-4266(00)00102-3
Cukierman, A., and S. Webb. 1995. Political Influence on the Central Bank: International Evidence. Center for the Study of the Economy and the State, The University of Chicago Working Paper No. 114.
Demirgüç-Kunt, A., and H. Huizinga. 1999. “Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence.” The World Bank Economic Review.13(2):379–408.
http://dx.doi.org/10.1093/wber/13.2.379
__________. 2000. Financial Structure and Bank Profitability. World Bank Policy Research Working Paper No. 2430.
Di Noia, C., and G. Di Giorgio. 1999. “Should Banking Supervision and Monetary Policy Tasks be Given to Different Agencies?” International Finance. 2(3):361–378.
http://dx.doi.org/10.1111/1468-2362.00034
European Central Bank. 2001. The Role of Central Banks in Prudential Supervision [Press Release]. Retrieved from website: http://www.ecb.int/pub/pdf/other/prudentialsupcbrole _en.pdf
Gaganis, C., and F. Pasiouras. 2013. “Financial Supervision Regimes and Bank Efficiency: International Evidence.” Journal of Banking and Finance.37(12):5463–5475.
http://dx.doi.org/10.1016/j.jbankfin.2013.04.026
Ghosh, S., and A. Das. 2005. Market Discipline, Capital Adequacy and Bank Behaviour: Theory and Indian Evidence. MPRA Paper No. 17398.
Goodhart, C., and D. Schoenmaker. 1993. Institutional Separation Between Supervisory and Monetary Agencies. LSE Financial Markets Group Special Paper Series No. 52.
__________. 1995. “Should the Functions of Monetary Policy and Banking Supervision be Separated?” Oxford Economic Papers, New Series.47(4):539–560.
Haubrich, J. 1996. Combining Bank Supervision and Monetary Policy. Federal Reserve Bank of Cleveland. Retrieved from website: http://www.clevelandfed.org/research/commentary/ 1996/1196.htm
Hellman, J., G. Jones, D. Kaufman, and M. Schankerman. 2000. Measuring Governance and State Capture: The Role of Bureaucrats and Firms in Shaping the Business Environment. European Bank for Reconstruction and Development Working Paper No. 51.
Llewellyn, D. T. 1999. The Economic Rationale of Financial Regulations. Financial Services Authority Occassional Paper No. 1.
Mirzaei, A., Liu, G., and Moore, T. 2011. Does Market Structure Matter on Banks’ Profitability and Stability? Emerging Versus Advanced Economies. Brunel University London Economics and Finance Working Paper Series No. 11-12.
Mishkin F.S. 2001. “Prudential Supervision: Why is it Important and What are the Issues.” Pp. 1–30 in Prudential Supervision: What Works and What Doesn't, edited by F.S. Mishkin. Chicago: University of Chicago Press.
Peek, J., E.S. Rosengern, and G.M.B. Tootell. 1999. “Is Bank Supervision Central to Central Banking?” The Quarterly Journal of Economics. 114(2):629–653.
http://dx.doi.org/10.1162/003355399556098
Pellegrina, L.D., and D. Masciandaro. 2008. “Politicians, Central Banks and the Shape of Financial Supervision Architectures.” Journal of Financial Regulation and Compliance.16(4): 290–317.
http://dx.doi.org/10.1108/13581980810918387
Quintyn, M., and M.W. Taylor. 2002. Regulatory and Supervisory Independence and Financial Stability. IMF Working Paper Series WP/02/46
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Published
2014-07-22
How to Cite
Raz, A. F., Irawan, C., Indra, T. P., & Darisman, R. (2014). Financial Supervision and Bank Profitability: Evidence from East Asia. Journal of Reviews on Global Economics, 3, 241–253. https://doi.org/10.6000/1929-7092.2014.03.19
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