Using data on South Africa’s commercial banks from 2005 to 2018, this study investigates the impact of bank regulation on bank performance. The research employs a fixed effects model for regression analysis and the data envelopment analysis approach to estimate efficiency scores.
The findings reveal several significant results. Firstly, there is a negative relationship between capital stringency and bank performance, suggesting that increased capital requirements compel banks to boost their reserves, thereby adversely affecting their performance. Secondly, a positive relationship exists between activity restrictions and bank performance. This indicates that such regulations, which may benefit the public as per the public interest view of regulation, also positively impact regulated banks.
Thirdly, there is a negative and significant relationship between supervisory power and bank performance. Lastly, the study finds a positive and significant relationship between the market discipline index and bank performance. This suggests that regulatory regimes fostering high market discipline environments enhance private investors' ability and incentives to monitor banks efficiently. Consequently, this leads to better management of banks and ultimately increases profitability.
Overall, the study concludes that regulation significantly impacts bank performance in South Africa.