supervision, and their concern is how to promote banking protability and stability.
The theory and the existing empirical evidence on the relationship between regulation,
supervision, protability and stability provided mixed results and led to ambiguous
implications (Barth et al., 2001,2004,2008,2010;Laeven and Levine, 2009;Pasiouras
et al., 2009;Klomp and De Haan, 2012;Chortareas et al., 2012;Lee and Hsieh, 2013).
This paper is an attempt to investigate the impact of regulatory and supervisory
policies (restriction on bank activities, capital requirement, deposit insurance,
supervisors’ power and independence of supervisory authority) and risk on the
protability of the biggest European banks. To this end, we analyze a database,
compiled from the World Bank by Barth et al. (2001,2004,2006,2008), as our sample,
which consists of the ten largest European banks of the selected European countries –
France, Germany, UK, Spain, Italy and Greece – over the period 2005-2011.
The rest of the study is organized as follows. Section 2 presents the literature review.
In Section 3, we present the methodology and the data and discuss the main results. In
Section 4, we conclude.
2. The literature review
There is mixed evidence on the impact of regulatory and supervisory policies on bank
performance. Barth et al. (2004) provide empirical evidence on the impact of specic
regulatory and supervisory practices on bank development and stability. Their results
indicate that there is no statistically signicant relationship between capital stringency,
ofcial supervisory power and bank performance. However, they nd that regulatory
and supervisory practices that force accurate information disclosure empower private
sector monitoring of banks, and foster incentives for private agents to exert corporate
control to best promote bank protability and stability. Specically, in a cross-country
setting, they show that regulatory and supervisory regimes with these features have
suffered fewer crises in the past two decades, have lower non-performing loans and have
deeper credit markets.
Laeven and Levine (2009), by using the ten largest publicly listed banks, nd that
capital stringency has little impact on actual bank risk and that capital requirements
affect bank stability, but only through their bank valuations. They nd also that activity
restrictions and deposit insurance increase bank risk, conrming the ndings of
Demerguç-Kunt and Detragiache (2002) and Barth et al. (2004,2006). The role of banking
regulation and supervision consists in enhancing protability and decreasing
risk-taking. Buch et al. (2008), using the database compiled by Barth et al. (2001), nd
that supervisory systems inuence the total risk of cross-bank mergers. They conclude
that the impact of banking regulations and supervisions on performance depends on
The international empirical evidence by Barth et al. (2010) indicates that tighter
restrictions on bank activities exert a negative impact on bank efciency, while greater
capital restrictions are marginally and positively associated with bank efciency. They
nd also that although there is no signicant relationship between ofcial supervisory
power and bank efciency, there is a signicant and positive relationship between the
latter and supervisory authority independence. Chortareas et al. (2012) investigate the
dynamics between regulatory and supervisory policies and European banks
performance over 2000-2008. They nd that strengthening capital restrictions and
ofcial supervisory powers can lead to an efcient functioning of banks. Their results