The impact of regulatory reform on cost and revenue efficiency of a bank: perspective from the Middle East and North Africa (MENA) countries

This paper examines the effects of the three pillars of the Basel II namely, capital regulations, official supervisory power and market discipline, plus activity restrictions and deposit insurance on cost and revenue efficiency of a bank. The theoretical and empirical literature about the relationships between bank regulations and bank efficiency are largely inconclusive. A nonparametric data envelopment analysis (DEA) is used to obtain the efficiency, and truncated maximum likelihood estimation technique is used to examine the impact of bank regulations on bank efficiency in the context of 132 commercial banks from 12 Middle East and North Africa (MENA) countries. The study results suggest that capital stringency has a positive effect on cost efficiency and activity restrictions show similar effect on revenue efficiency. Moreover, official supervisory power improves cost efficiency and reduces revenue efficiency. On the contrary, market discipline mechanisms reduce cost efficiency and improve revenue efficiency. Finally, deposit insurance reduces both cost and revenue efficiency.Key Words: Bank regulations; Basel II, cost and revenue efficiency; MENA countriesJEL Classifications: G21, G28, G3