Bank regulation and efficiency: What works for Africa?

Abstract

We use a new dataset on regulation and supervision in 42 countries to study the relationship between the regulatory framework and bank efficiency in Africa. Specifically, we examine how bank efficiency is influenced by requirements related to (i) Overall capital stringency, (ii) Restrictions on entry into banking, (iii) Restrictions on bank activities, (iv) Transparency requirements, (v) Restrictions on exit from banking, (vi) Liquidity and diversification requirements, (vii) Price controls (financial repression), (viii) Availability of financial safety nets and (ix) Quality of supervision. We find that increased availability of financial safety nets to have efficiency-enhancing effects for African banks. We also find that the effect of some bank regulation in Africa is highly dependent on the size and risk level of the bank. Specifically, our results suggest that more stringent restrictions on entry increase the efficiency of large banks, while restrictions on exit reduce the efficiency of small banks. Similarly, high-risk banks benefit, in terms of efficiency, from increased restrictions on entry whereas low risk banks do not benefit from increased restrictions on exit. Our results also suggest that small banks are the main losers from increased transparency requirements and price controls while more stringent capital requirements only enhance the efficiency of large banks and low risk banks. Overall, our findings support the argument that regulation should be adapted to the risk and size level of the institutions that are being regulated.