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Cost-benefit analysis of bank regulation: Does size matter?

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  • Mulindi, Hillary

Abstract

This study investigates the trade-off between costs and benefits of bank regulation in Kenya. Using the Stochastic Frontier Analysis (SFA) and Annual data for the period 2003 - 2019, extracted from KBA Financial Database and KNBS macroeconomic data, the study models Industry-level and cluster level relationship between bank regulation and cost inefficiency of banks. The industry-level analysis indicates that stringent capital requirement has a positive and significant effect on the cost-efficiency of banks, while tighter liquidity requirements hurt cost efficiency. Further, the bank tier-level analysis established that the double-layered regulatory framework creates Cost inefficiencies amongst middle-tier banks. The key policy implication would be to consider reviewing, identifying, and amending the regulatory provisions that are creating inefficiencies among the listed middle-tier banks

Suggested Citation

  • Mulindi, Hillary, 2021. "Cost-benefit analysis of bank regulation: Does size matter?," KBA Centre for Research on Financial Markets and Policy Working Paper Series 51, Kenya Bankers Association (KBA).
    • Handle: RePEc:zbw:kbawps:51
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    More about this item

    Keywords

    Bank Regulation; Cost-Benefit Analysis; Stochastic Frontier Analysis;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models

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