Regulations, Market Power and Bank Efficiency in European Countries

This paper investigates whether different types of regulation may have a direct or indirect (through market power) impact on bank’s efficiency. We use a set of data containing European banks to consider the impact of regulations related to capital requirements, official supervisory power, restrictions on bank activities, and private monitoring on bank efficiency. Our results suggest that official supervisory power increase bank efficiency, activity restrictions and private monitoring reduce bank efficiency in general, but for banks with more market power these effects are all significantly positive. While stricter capital requirements in combination with more market power has a negative impact on bank efficiency. Our results also find a non-linear relationship between market power and bank efficiencies. Besides, the evidence of subsamples suggests that regulations will have different effect on bank efficiency in developed or developing countries.