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Do Regulations Affect Banking Performance? Government Governance May Matter

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  • CHUNG-HUA SHEN
  • YUEN-HSIANG CHANG
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    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") Copyright 2006 Western Economic Association International.

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    Bibliographic Info

    Article provided by Western Economic Association International in its journal Contemporary Economic Policy.

    Volume (Year): 24 (2006)
    Issue (Month): 1 (01)
    Pages: 92-105

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    Handle: RePEc:bla:coecpo:v:24:y:2006:i:1:p:92-105

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    Cited by:
    1. 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.
    2. Alexander Raskovich, 2008. "Should Banking Be Kept Separate from Commerce," EAG Discussions Papers 200809, Department of Justice, Antitrust Division.
    3. Janto Haman & Hristos Doucouliagos & Michael Graham, 2012. "Agency Problem II and Convergence in CEO Pay," Economics Series 2012_5, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
    4. 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.
    5. Wu, Meng-Wen & Shen, Chung-Hua, 2013. "Corporate social responsibility in the banking industry: Motives and financial performance," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3529-3547.
    6. 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.
    7. Alexander Raskovich, 2008. "Should Banking Be Kept Separate from Commerce," EAG Competition Advocacy Papers 200809, Department of Justice, Antitrust Division.

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