Abstract
With a comprehensive dataset covering 148 countries over 1995–2015, this study investigates the relationship between competition and efficiency in the banking industry. Evidence shows that bank competition is detrimental to cost efficiency, which is at variance with the intuitive “quiet life” hypothesis. The bank regulatory and institutional environment in which banks operate not only influences bank efficiency, but also affects the link between competition and efficiency. Restrictive regulations on bank activities and stringent capital requirements reduce, whereas effective supervision and information sharing of credit registries increase efficiency. The adverse impact of competition on efficiency can be mitigated or even reversed by well-implemented regulations, supervision, and information sharing mechanisms.
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