Regulation, Supervision, Procyclicality and Banking Profitability

This article investigates the impact of regulation and supervision frameworks on the profitability of the Moldovan banking sector, using all banks from the sector as the sample. The analysis yields four major findings. First, the reinforcement of restrictions on banks' activities (banking regulations) has a positive effect on the profitability of Moldovan banks. More severe restrictions (less liberalization) on banking activities are effective in reducing the risk of insolvency and, consequently, help ensure profitability. Second, the power granted to supervisors, through their interventions aimed at ensuring the proper functioning of the banks (banking supervision), does not appear to enhance bank profitability. This is because intensive supervision may impose significant compliance costs and operational constraints that materially reduce profitability. Third, the business cycle has a positive impact on the profitability of the Moldovan banking sector: during periods of economic growth, the likelihood of higher bank earnings increases. Finally, the analysis confirms that macroeconomic factors play an important role, especially in the context of procyclical financial systems. To obtain more robust results, it is crucial to consider both bank-level and country-level determinants. Moreover, in the context of macroeconomic factors, it would be interesting to further develop the research by analyzing the impact of COVID-19 and, more recently, the war in Ukraine (which began in 2022) on the profitability of Moldovan banks.