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Do Regulations Affect Banking Performance? Government Governance May Matter

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  • CHUNG‐HUA SHEN
  • YUEN‐HSIANG CHANG

Abstract

The authors study the impact of restrictions on commercial banks' engagement in securities, insurance, and real estate, as well as a mix of banking and commerce. The model specifies the impact as a function of government governance (the rule of law), which allows the authors to investigate two conflicting hypothesis, i.e., the restriction‐enhancing hypothesis and facility‐supporting hypothesis. The former effect suggests that good governance enhances the hypothesized adverse effect of restrictions, and the latter suggests that good governance mitigates this adverse effect. The study clearly demonstrates that restrictions on commercial banks' right to engage in securities and insurance, along with restrictions on the mixing of banking and commerce, reduce bank profits. However, good governance mitigates such an adverse impact, i.e., the facility‐supporting hypothesis is supported. Restrictions on real estate, on the other hand, seem to have positive effects on bank profits. The results are robust to different specifications. (JEL G21, G28)

Suggested Citation

  • Chung‐Hua Shen & Yuen‐Hsiang Chang, 2006. "Do Regulations Affect Banking Performance? Government Governance May Matter," Contemporary Economic Policy, Western Economic Association International, vol. 24(1), pages 92-105, January.
    • Handle: RePEc:bla:coecpo:v:24:y:2006:i:1:p:92-105
    DOI: 10.1093/cep/byj013
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    Cited by:

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    2. Alexander Raskovich, 2008. "Should Banking Be Kept Separate from Commerce," EAG Competition Advocacy Papers 200809, Department of Justice, Antitrust Division.
    3. Saadaoui, Zied, 2009. "Fonds propres réglementaires et stabilité bancaire dans les pays émergents [Capital Requirements and Banking Stability in Emerging Countries]," MPRA Paper 25217, University Library of Munich, Germany.
    4. Shen, Chung-Hua & Lin, Mei-Rong, 2011. "The determinants of cross-border consolidation in eight Asian countries: Before and after the Asian financial crisis," Journal of Multinational Financial Management, Elsevier, vol. 21(2), pages 89-105, April.
    5. Hristos Doucouliagos & Janto Haman & Saeed Askary, 2007. "Directors' Remuneration and Performance in Australian Banking," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(6), pages 1363-1383, November.
    6. Biktimirov, Ernest N. & Afego, Pyemo N., 2022. "Does investors’ valuation of corporate environmental activities vary between developed and emerging market firms?," Finance Research Letters, Elsevier, vol. 47(PA).
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    9. Alexander Raskovich, 2008. "Should Banking Be Kept Separate from Commerce," EAG Discussions Papers 200809, Department of Justice, Antitrust Division.
    10. Gaganis, Chrysovalantis & Liu, Liuling & Pasiouras, Fotios, 2015. "Regulations, profitability, and risk-adjusted returns of European insurers: An empirical investigation," Journal of Financial Stability, Elsevier, vol. 18(C), pages 55-77.
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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