The Impact of Bank Regulation and Supervision on Competition: A Evolution in the Emerging Economies

Abstract

This article empirically investigates the influence of bank regulation and supervision on the competitive landscape within banking systems. Using the information on 23 emerging economies from 1996 to 2016, we confirm banking system with lower activity restrictions and (foreign) bank entry barriers to be more competitive. The greater capital stringency and official supervisory power enhances the competition in banking industry. Our findings also highlight that greater explicit guidelines for asset diversification and deposit insurance coverage, and lower private-sector monitoring are associated with more intensive bank competition. A further examination concerning bank crisis reveals that during the bank crisis, the relationship between activity restriction, entry barriers, diversification guidelines and competition become more pronounced, and the positive effect of foreign bank limitation, capital stringency, official supervisory power, and private monitoring on competitive condition become less effective. Finally, we categorize our sample into foreign banks and domestic banks and find that foreign banks are more sensitive to the official supervisory power and private monitoring, and less sensitive to activity restrictions, foreign bank limitations and diversification guidelines.