Abstract
M.Com. (Finance)
The effects of bank regulation and supervision on bank performance and risk taking have recently been subject to a number of empirical studies. However, these studies have largely produced conflicting and inconclusive results and very few such studies have been conducted in South Africa. Although aspects of bank regulation and supervision are quite broad, scholars have recently focused on the four aspects based on the three pillars of the Basel II Accord, namely, capital requirements, official supervision, private sector monitoring of banks and restrictions on banking activities. A quantitative approach was adopted in this study to establish the nature and significance of the relationships between aspects of bank regulation and supervision variables and bank performance and risk taking variables. Panel data regression techniques were applied to the variables obtained from historic data for the period 1999 to 2010. The main regression results indicated that bank regulation and supervision do not have statistically significant effects on bank performance and risk taking in South Africa when all fifteen banks in the sample are analysed collectively. When banks are grouped and analysed separately, the results indicated that for large banks only capital requirements regulation improves bank performance by enhancing net interest margins and lowering operating costs but other aspects do not affect bank performance. Only restrictions on banking activities and official supervisory power reduce credit risk taking for large banks. For medium-sized banks, only capital requirements regulation improves cost efficiency while restrictions on bank activities and official supervisory powers increase operating costs. Capital requirements regulation reduces credit risk taking and overall bank risk taking; however, restrictions on banking activities and official supervisory power increase credit risk taking for medium banks although they do not affect overall bank risk taking. The performance of small banks is negatively affected by restrictions on banking activities. Restrictions on banking activities and official supervisory power reduce credit risk taking for small banks but capital requirements regulation increases credit risk taking. This study concludes that bank regulation and supervision do not have uniform effects across all bank sizes in South Africa. Therefore policies should be designed to target different categories of bank sizes for them to be more effective in achieving their desired outcomes.