How Labour Market Regulation Shapes Bank Performance in Eu-15 Countries?

Abstract

The European banking industry is undergoing significant structural changes and cost-cutting programs, also as a result of the financial crisis. Yet, the institutional features that affect banks’ ability to adjust costs and in particular personnel expenses, which comprise a significant part of banks’ non-interest cost structure, have not been adequately studied. This paper investigates the effect of labour market institutions and regulations on bank performance in EU-15 countries. Results indicate the existence of a negative relationship between bank performance and the liberalization of EU labour markets. However, when looking at the disaggregated components of the labour index, we find evidence that different forces are at play and that the liberalization of the minimum wage, hiring and firing regulations and the cost of dismissals could assert a positive effect on efficiency.