International evidence on the impact of regulations and supervision on banks' technical efficiency: An application of two-stage data envelopment analysis

This study uses a sample of 715 banks from 95 countries and two-stage data envelopment analysis (DEA) to provide international evidence on the impact of regulations and supervision approaches on banks' efficiency. We first use DEA to estimate technical and scale efficiency. We then use Tobit regression to investigate the impact of several regulations related to capital adequacy, private monitoring, banks' activities, deposit insurance schemes, disciplinary power of the authorities, and entry into banking on banks' technical efficiency. We estimate several specifications while controlling for bank-specific attributes and country-level characteristics accounting for macroeconomic conditions, financial development, market structure, overall institutional development, and access to banking services. In several cases, the results provide evidence in favour of all three pillars of Basel II that promote the adoption of strict capital adequacy standards, the development of powerful supervisory agencies, and the creation of market disciplining mechanisms. However, only the latter one is significant in all of our specifications. While the remaining regulations do not appear to have a robust impact on efficiency, several other country-specific characteristics are significantly related to efficiency. © 2007 Springer Science+Business Media, LLC.