Effects of Banking Regulations on Bank Stability: Evidence from Developing Countries

Abstract

Using the two-step system generalized method of moments (SGMM) estimation, this paper examines the influences of banking regulations on bank stability (measured by the banks’ Z-scores) across a broad selection of 26 developing countries before, during, and after the global financial crisis 2007–2008. The empirical results suggest that stricter banking regulations have no significant impact on bank stability but not all dimensions of banking regulation matter. In particular, overall restrictions on banking activities has a statistically significant and negative impact on bank stability. Besides, some control variables influence significantly the bank stability including GDP deflator, financial openness, institutional quality, and interaction between financial openness and institutional quality.