The effect of market structure, regulation, and risk on banks efficiency: Evidence from the Gulf cooperation council countries

Aktham I. Maghyereh, Basel Awartani

    Research output: Contribution to journalArticlepeer-review

    20 Citations (Scopus)

    Abstract

    Purpose: The purpose of this paper is to analyze the efficiency performance of the Gulf Cooperation Countries (GCC) banking sector. The primary focus is to assess whether market power, risk taking activities, and regulations have significant effects on GCC banks' efficiency performance. Design/methodology/approach: The estimation and inference has been implemented using a double bootstrap procedure that simultaneously corrects for bias and validates inference on the influence of covariates. In the first stage, efficiency scores are estimated with data envelopment analysis (DEA). In the second stage, variation in the resulting efficiency scores is explained using a truncated regression model with inference based on a semi-parametric bootstrap routine. Findings: The authors found compelling evidence that efficiency is not independent of the market structure, the bank's risk taking activities, and the regulatory environment. In particular, the Lerner Index provides evidence that market power decreases efficiency. The capital adequacy, the supervisory power and the market discipline were all found to improve efficiency. Additionally, when the risk is measured by the Z-Score or even by the ratio of non-performing loans to total loans, it adversely affects efficiency. Research limitations/implications: The results of the current study have important implications for regulators and supervisors. Promoting banks' competitive environment in the GCC countries through reducing the information barriers to entry, encouraging bank privatization, and lowering the activities restrictions can potentially improve operational efficiency of banks. Also enhancing banks' diversification activities and risk management techniques may have the advantage of increasing operational efficiency. Furthermore, improvements in the regulatory conditions that enhance banking supervision and monitoring would also improve efficiency. Originality/value: The main contributions of the paper are threefold: first, to the knowledge, this study is the first to employ by far the most comprehensive data set of GCC banks investigated to date. Second, the analysis focusses on the influence of a wide set of factors, most of them was not covered before in related economic literature on bank efficiency of the GCC countries. Third, the methodological innovation involves applying a double bootstrap procedure proposed by Simar and Wilson (2007).

    Original languageEnglish
    Pages (from-to)405-430
    Number of pages26
    JournalJournal of Economic Studies
    Volume41
    Issue number3
    DOIs
    Publication statusPublished - May 2014

    Keywords

    • Bank efficiency
    • GCC banks
    • Market power
    • Regulations
    • Risk-taking

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

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