Foreign ownership, bank efficiency and stability: Whether the institutional quality of countries is important?

Abstract

Abstract This article is aimed to investigate the extent to which the home and host countries' institutional quality helps explain the efficiency and stability differences between the domestic and foreign banks operating in Tunisia and Morocco over the 2005–2017. For this purpose, a simultaneous equations approach was considered to investigate the dynamics between efficiency and stability. Our framework follows the premise that stability is endogenously related to efficiency only for Moroccan banks' sample when models' estimation has been administered considering each country separately. The findings reveal also the persistence of a positive effect of foreign ownership on bank efficiency, highlighting that banking efficiency need be effectively sustained with a reasonable level of institutional development. Moreover, the institutional differences characterizing the home and host countries has a negative impact on the foreign banks' stability. Accordingly, policy makers in the Great Maghreb area could well aspire to enhance foreign ownership in their banking sector, on the ground that it helps remarkably in improving corporate governance and boosting efficiency, given mainly the acquired technical advantages often associated with their developed home countries. The generalized moments method estimator outlines the persistence of a noticeable banking inefficiency and stability, with a significant effect of the stability variable on banks' inefficiency and performance, suggesting that banking‐efficiency boosting policies might well ultimately guide and veer management choices towards less risky investments.

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