Regulation, supervision and European banking performance

We investigate the effects of regulation and supervision on the banking performance of the ten largest banks from selected European countries during the period of 2005-2011 using the generalised method of moments (GMM) for a dynamic panel. Our results provide two major findings. Firstly, with regard to influencing factors, regulation and supervision perform differently. In particular, restrictions on banking activities, supervision, deposit insurance and private monitoring have different impacts on banking performance, depending on the indicators of profitability and risk taking. Capital requirements decrease banking profitability, but the market structure boosts return on equity (ROE). Secondly, neglecting the influencing factors, we find that restrictions on banking activities, supervision, private monitoring and market structure increase profitability and reduce risk taking by European banks. We conclude that for the successful implementation of banking regulation and supervision, it is crucial to consider bank-level and country-level factors. In addition, the effect of regulation and supervision on banking performance is conditioned by the improvement of banking governance in Europe.