How a regulatory capital requirement affects banks’ productivity: an application to emerging economies

Duygun, Meryem; Shaban, Mohamed; Sickles, Robin C.; Weyman-Jones, Thomas

Abstract

This paper presents a novel approach to measure efficiency and productivity decomposition in the banking systems of emerging economies with a special focus on the role of equity capital. We model the requirement to hold levels of a fixed input, i.e. equity, above the long run equilibrium level or, alternatively, to achieve a target equity-asset ratio. To capture the effect of this under-leveraging, we allow the banking system to operate in an uneconomic region of the technology. Productivity decomposition is developed to include exogenous factors such as policy constraints. We use a panel data set of banks in emerging economies during the financial upheaval period of 2005–2008 to analyse these ideas. Results indicate the importance of the capital constraint in the decomposition of productivity.

Citation

Duygun, M., Shaban, M., Sickles, R. C., & Weyman-Jones, T. (2015). How a regulatory capital requirement affects banks’ productivity: an application to emerging economies. Journal of Productivity Analysis, 44(3), 237-248. https://doi.org/10.1007/s11123-015-0451-1

• Journal Article Type: Article
• Acceptance Date: Dec 1, 2015
• Online Publication Date: Jun 4, 2015
• Publication Date: Dec 1, 2015
• Deposit Date: Mar 11, 2019
• Print ISSN: 0895-562X
• Publisher: BMC
• Peer Reviewed: Peer Reviewed
• Volume: 44
• Issue: 3
• Pages: 237-248
• DOI: https://doi.org/10.1007/s11123-015-0451-1
• Keywords: Banking Efficiency and productivity analysis Shadow price Cost function Regulated capital Bank capitalization
• Public URL: https://nottingham-repository.worktribe.com/output/1624386
• Publisher URL: https://link.springer.com/article/10.1007/s11123-015-0451-1
• Additional Information: JEL Classification; C23 D24 G21