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Capital regulation, monetary policy and asymmetric effects of commercial banks' efficiency

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  • Yong Li
  • Mancang Wang
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    Abstract

    Purpose–Owing to the importance of the efficiency of commercial banks, the aim of this paper is to find the relationship between capital regulation, monetary policy and the asymmetric effects of the commercial banks' efficiency. Design/methodology/approach–First, the paper makes a static profit model of commercial banks with double constraints and then makes a proposition with numeric simulation. Findings–In this paper, the author finds it unreasonable to calculate the commercial banks' cost and profit efficiency by SFA (DEA) directly, as there is no evidence that indicates the linearity relationship among them. Hence, more complicated solutions should be introduced. Research limitations/implications–The rate of non-performing loans (NPL) is inversely proportional to the commercial banks' cost and profit efficiency and capital adequacy ratio (CAR) and statutory reserve ratio (SRR) show a nonlinear relationship between commercial banks' cost and profit efficiency. Hence, the paper defines the different influences of commercial banks' efficiency imposed by CAR and SRR as the asymmetric effects of commercial banks' efficiency. Practical implications–The nonlinear relationship is found based on improved Kopecky and VanHoose, so excessive regulation has harmful effects on the commercial banks. The reasonable capital regulation and other prudential supervision measures should be emphasized. Originality/value–First, the paper gets its proposition through the improved KV model, which displays a new perception on analyzing this problem. Second, the nonlinear relationship is discovered by this new model and the empirical results show the nonlinear relationship further.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=2044-1398&volume=2&issue=1&articleid=17012937&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal China Finance Review International.

    Volume (Year): 2 (2012)
    Issue (Month): 1 (February)
    Pages: 5-26

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    Handle: RePEc:eme:cfripp:v:2:y:2012:i:1:p:5-26

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Asymmetric effects; Capital regulation; Commercial banks efficiency; Monetary policy; Numerical analysis;

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    References

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    1. Kwan, Simon H., 2006. "The X-efficiency of commercial banks in Hong Kong," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1127-1147, April.
    2. Kopecky, Kenneth J. & VanHoose, David, 2004. "A model of the monetary sector with and without binding capital requirements," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 633-646, March.
    3. Roberta B. Staub & Geraldo Souza & Benjamin M. Tabak, 2009. "Evolution of Bank Efficiency in Brazil: A DEA Approach," Working Papers Series 200, Central Bank of Brazil, Research Department.
    4. Kopecky, Kenneth J. & VanHoose, David, 2004. "Bank capital requirements and the monetary transmission mechanism," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 443-464, September.
    5. Ariff, Mohamed & Can, Luc, 2008. "Cost and profit efficiency of Chinese banks: A non-parametric analysis," China Economic Review, Elsevier, vol. 19(2), pages 260-273, June.
    6. Berger, Allen N. & Humphrey, David B., 1997. "Efficiency of financial institutions: International survey and directions for future research," European Journal of Operational Research, Elsevier, vol. 98(2), pages 175-212, April.
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