Banking Supervision and Risk-Adjusted Performance in the Host Country Environment

Abstract

We study the effect of the banking supervision in institutional settings of foreign-bank dominated financial systems of Central, Eastern and South-Eastern Europe in post-crisis period 2012-2018. For a dataset of 450 banks from 20 economies of the region, we use a mediation-moderation analysis framework to establish a relationship between regulatory scrutiny, supervisory activities and a bank risk-adjusted economic performance. We find that a higher intensity of supervision monitoring activities, especially by the centralized form of supervision, contributes to the decline of the bank's riskiness in case of larger size banks while not affecting their economic performance. The regulatory power and capital regulation stringency indicate a positive effect on the risk-adjusted performance for capital constrained banks, but moderately decrease the economic benefit for larger banks. In light of the ongoing debate on the architecture of supervision in the region, the findings highlight the potential area of attention for regulators and policymakers and thus, contribute to the designing of effective supervision mechanism.

Keywords: Supervision, Financial Regulation, RAROC, Causal Mediation Analysis, Moderation Analysis, Central Eastern and South-Eastern Europe

JEL Classification: G20, G21, G28