The Effects Of Regulation And Supervision On European Banking Profitability And Risk: A Panel Data Investigation

Abstract

This paper studies the effects of regulatory and supervisory policies on profitability and risk-taking for European banks over the period 2005 to 2011. As these effects may vary according to the banks, we apply the Generalized Method of Moments (GMM) for dynamic panels to capture further heterogeneous supervision effects before and after the subprime crisis. Accordingly, our findings provide three interesting results. First, strengthening regulations and supervision improves profitability and boosts the stability of European banking systems. Second, our findings highlight a positive correlation between capital adequacy, deposit insurance systems, and banks’ profitability. Third, we note that stepping up supervisors’ powers reduces risk-taking and promotes banking stability.