The Impact of Bank Regulation and Supervision on Competition: Evidence from Emerging Economies

Abstract

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

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