The Effect of Economic Freedom on Commercial Banks Efficiency, Does Economic Freedom Enhance Bank’s Efficiency?

Abstract

Generally the main objective of commercial banks is to increase shareholders’ wealth via profit maximization or cost minimization. The profitability of banks is associated with the stage of bank’s efficiency. To achieve a greater efficiency level, the banks have to be aware to their profits and costs levels. Additionally, the main elements of economic freedom are individual selection, voluntary exchange, freedom to compete, and protection of person and property. Nevertheless, some essential foundations of economic freedom normally those related to property rights, regulatory restrictions and government regulations are difficult to capture with objective processes. Therefore, the degree of economic freedom is playing a vital role in financial institutions’ profitability and banks’ efficiency specifically. This study contains two stages of analysis in order to examine the efficiency of the European banking system. In the first stage, will use the “bootstrap Data Envelopment Analysis (DEA)” method to measure the efficiency of particular banks in the period 2010-2018. Then use panel data regression “(Pooled OLS, Random effect RE and Fixed effect FE)” to examine the impact of economic freedom on bank efficiency. The findings show that a strong positive connection between some indicators of the economic freedom index such as overall economic freedom, business freedom and financial freedom and the efficiency of the bank under this study. On the other hand, this study has found that property right indicator negatively affecting bank’s efficiency. Similarly tax burden indicator has a strong negative relationship with bank’s efficiency.