Abstract
Over last two decades, emerging and developing nations have desperately endeavored for efficient banking sectors. In this study, we argue that bank efficiency generates incentives that can impact banks’ capital holdings and the cost of financial intermediation. Analyzing a panel dataset of 1190 banks from BRICS (Brazil, Russia, India, China, South Africa) countries over the period 2007–2015, we find robust evidence that more efficient banks hold higher capital and charge lower financial intermediation costs. In an extended sample over the period 2000–2015, we observe that cost efficiency had a marginal positive impact on bank capital during the global financial crisis of 2007–2009. We also observe that on average, banks increased the cost of financial intermediation during the crisis, however, greater efficiency helped banks to not charge higher intermediation costs. Our results imply the beneficial impact of bank efficiency for bank stability and real economy.
Highlights
In response to the global financial crisis (GFC) of 2007–2009, regulatory authorities in many countries have adopted stringent capital requirements in the form of Basel-III for banks to ensure future financial stability
This paper aims to examine the impact of bank cost efficiency on bank capital and the cost of financial intermediation
Employing a panel dataset of 1190 banks from five BRICS countries over the period 2007–2015, we find that cost efficiency has a significant positive impact on bank capital and a significant negative impact on banks’ cost of financial intermediation
Summary
In response to the global financial crisis (GFC) of 2007–2009, regulatory authorities in many countries have adopted stringent capital requirements in the form of Basel-III for banks to ensure future financial stability. Admati and Hellwig (2013) argue that equity is ‘not expensive’ and suggest even higher equity ratios (i.e., 20 to 30 percent) They argue that equity appears expensive because debt is subsidized by tax-payer-backed deposit insurance and bailout schemes, and suggest that maintaining higher equity ratios wouldn’t increase credit cost. Fonseca and González (2010) find that bank market power and capital levels have a positive association Contributing to this latter literature, we examine whether bank cost efficiency impacts bank capital. We examine the impact of cost efficiency on banks’ cost of financial intermediation
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