Basel regulations and banks’ efficiency: The case of the Philippines |
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Institution: | 1. University of Economics, 59C Nguyen Dinh Chieu Street, District 3, Ho Chi Minh City, Vietnam;2. CFVG, 91 Ba Thang Hai Street, District 10, Ho Chi Minh City, Vietnam;1. Department of Economics, University of Southern California, CA, United States;2. Department of Quantitative Finance, National Tsinghua University, Taiwan;3. WISE, Xiamen University, Xiamen, China;4. National School of Development, Peking University, Beijing, China |
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Abstract: | Using stochastic frontier analysis, this paper has examined the impact of Basel II on the cost efficiency of Philippine commercial banks from 2001 to 2011. The overall mean cost efficiency estimate is 0.75, indicating substantial inefficiencies in the banks averaging to 25% of total costs. Findings show that higher capital requirement tends to improve the cost efficiency but more powerful supervisors can adversely affect the efficiency of the banks. The other potential correlates that may help explain the efficiency of the banks are risk and asset quality and bank-specific variables. From a policy perspective, this study is informative to policymakers on the general direction in which to proceed with reforms (i.e., maintain higher capital requirements, curtail powerful supervisors, and enhance private monitoring) and in identifying factors that could contribute to banks’ efficiency especially in light of the newly implemented Basel III in the country. In effect, this paper also assesses the readiness of the banks toward the implementation of Basel III. |
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Keywords: | Cost efficiency Basel II Stochastic frontier Philippine commercial banks Regulations E44 E58 G21 |
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