Financial Reform and Bank Efficiency: A Multi-Country Analysis

Abstract

This paper investigates the impact of financial reform on bank efficiency. More specifically, we distinguish between financial liberalization measures and measures of the quality of bank regulation measures, and study their relationship to bank efficiency separately. Moreover, we analyze whether the impact of financial liberalization on bank efficiency is conditional on the quality of prudential regulation of the banking system. We apply stochastic frontier analysis to calculate bank efficiency at the individual bank level and use a new and detailed database that measures different aspects of financial reform. The dataset consists of a sample of over 26,000 bank-year observations from 41 countries for the period 1996-2002. Overall, we find support for the positive impact of financial liberalization policies, as well as for the quality of bank regulation, on bank efficiency. Moreover, we show that the impact of financial liberalization policies is conditional on the extent to which bank regulation has been adopted.