Does Business Regulation Matter for Banks in the European Union?

This paper provides a comprehensive analysis of the impact of business and financial specific regulations on banks in the EU-27 over the 2004-2010 periods. We employ for the first time in the banking literature a unique dataset of a wide range of regulation indices from the “Doing Business” project of the World Bank. Results for the credit regulation indices show that the strength of creditor rights is negatively related to bank performance as measured by cost efficiency, although this effect becomes less resilient during the recent crisis period (2008-2010). On the other hand, credit information sharing improves performance, a result that is further magnified during the crisis. Tax-compliance costs and entry regulation constrain bank performance. More stringent regulation of labour, in terms of minimum wage and dismissal costs, and insolvency regulation are positively associated with performance. Furthermore, regulation that protects investors from management expropriation, such as the extent of director liability, exerts a positive impact on bank performance and more so in the crisis years. Finally, we use interaction terms between the business regulation variables and institutional quality as measured by the rule of law and corruption. Results show that there are cases that institutional quality influences positively or negatively the individual effects of specific types of business regulation on bank performance.