Determinants of Bank Performance and Efficiency in Developed (G7) and Developing (E7) Countries and role of the Regulatory and Economic Environment

  • Asma Nasim

Student thesis: Doctoral Thesis

Abstract

Economic growth has been viewed as being significantly influenced by banking performance and efficiency. Banks obtain deposits from excess funds and lend money to investors who support overall economic expansion. Direct participation in economic activities and the channelling of funds are recent developments in the banking sector. As a result, academic researchers are becoming increasingly concerned about banking performance and how it affects economic growth. According to the literature, a number of factors influenced banking performance and efficiency. In this study we look at four categories of variables. This study analyses the implications of the regulatory and economic environment, monetary policy regime, and uncertainty for bank performance and efficiency. We study banking system of G7 and E7 because, It was observed that the shift of economic power from developed to developing countries had an impact on the international banking business, but G7 countries dominate the global financial governance and have not yet lost control of the global financial and economic governance agenda. Research questions that we analysed in this research include What are the determinants of Bank Performance (Profitability and other measures of performance) in G-7 and E-7? What are the determinants of Bank Efficiency (different aspects of efficiency) in G-7 and E-7? Is there a nexus between bank performance and efficiency in G-7 and E-7? The study's research goals were: To analyse the determinants of Bank Performance (Profitability and other measures of performance) in G-7 and E-7, To investigate the determinants of Bank Efficiency (different aspects of efficiency) in G-7 and E-7 and to explore the nexus between bank performance and efficiency in G-7 and E-7, which were not investigated before. Employing multiple indicators of bank performance and efficiency and underlying explanatory factors, we used a novel set of empirical approaches including Fixed Effects, Random Effects, Panel Fully Modified Least Squares (FMOLS), Panel Dynamic Least Squares (DOLS), the Generalized Method of Moments (GMM) and DEA. With the help DEA we developed two variables of efficiency these are operational investment efficiency of banking sector . First, the models were evaluated in their entirety and then they were divided into two equal groups of seven countries. All the variables had a statistically significant impact on banking performance both positively and negatively. Considering the data of both developed (G7) and developing (E7) economies from 2001 to 2020, our results reveal that leverage, capital adequacy, monetary policy, economic growth, inflation, exchange rate and uncertainty have significant implications for various aspects of bank performance. There are significant differences between the developed and developing economies’ banking sector performance and efficiency under the influence of regulatory and economic environment, monetary regime, and uncertainty. For the banking industry, operational and investment efficiencies are two of the most significant factors promoting long-term performance and financial sustainability. Our key findings show that leverage, capital adequacy, monetary conditions, economic outlook, price stability as well as exchange rate stability and uncertainty have substantial effects on underlying indicators of bank efficiency. Under the effects of the regulatory and economic environment, uncertainty, and monetary regime the banking sector efficiency of developed (G7) and developing (E7) economies differ substantially. Moreover, the nexus between performance and efficiency reveals that efficiency has a positive impact on return on assets, but it has a negative impact on return on equity. The outcomes outlined in this study hold significant policy implications. The financial sector reforms implemented in G7 & E7 will significantly improve the performance and efficiency of the banking sector. Additionally, during EPU government have to support bank to boost their profit by reducing taxes on development activities. Finally, policy makers and bank management have to sit together to make better policies.
Date of Award2 Jun 2023
Original languageEnglish
SupervisorGareth Downing (Main Supervisor)

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