NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation

Asli Demirguc-Kunt, Luc Laeven, Ross Levine

NBER Working Paper No. 9890
Issued in August 2003
NBER Program(s):   IFM

This paper examines the impact of bank regulations, market structure, and national institutions on bank net interest margins and overhead costs using data on over 1,400 banks across 72 countries while controlling for bank-specific characteristics. The data indicate that tighter regulations on bank entry and bank activities boost the cost of financial intermediation. Inflation also exerts a robust, positive impact on bank margins and overhead costs. While concentration is positively associated with net interest margins, this relationship breaks down when controlling for regulatory impediments to competition and inflation. Furthermore, bank regulations become insignificant when controlling for national indicators of economic freedom or property rights protection, while these institutional indicators robustly explain cross-bank net interest margins and overhead expenditures. Thus, bank regulations cannot be viewed in isolation; they reflect broad, national approaches to private property and competition.

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Document Object Identifier (DOI): 10.3386/w9890

Published:

  • Demirgüç-Kunt, Asli, Luc Laeven, and Ross Levine. "Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation." Journal of Money, Credit and Banking 36(3): 593-622, June 2004 ,
  • Asli Demirgüç-Kunt & Luc Laeven & Ross Levine, 2004. "Regulations, market structure, institutions, and the cost of financial intermediation," Proceedings, Federal Reserve Bank of Cleveland, pages 593-626.

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