Summary Regulatory Reforms and Their Impact on Financial Institutions Profitability

DISSERTATION

On


Regulatory Reforms and Their Impact on Financial
Institutions Profitability

,Contents


Title Page i

1 INTRODUCTION 1
1.1 Background of the Study . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Problem Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Research Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 Research Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2 REVIEW OF LITERATURE 7
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 The Global Financial Crisis and the Necessity for Regulatory Reforms . 7
2.3 Evolving Regulatory Standards: An Analysis of Basel Accords . . . . . 8
2.3.1 Basel I and Basel II: Pioneers and Weaknesses(Moosa 2008) . . 8
2.3.2 Basel III: A Response to GFC . . . . . . . . . . . . . . . . . . 9
2.4 Other Regulatory Reforms . . . . . . . . . . . . . . . . . . . . . . . . 10
2.5 Approaches to Examining the Effects of Regulation on Profitability of
Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.5.1 Prudential Regulation Approach . . . . . . . . . . . . . . . . . 11
2.5.2 Cost of Compliance Approach . . . . . . . . . . . . . . . . . . 11
2.5.3 Competitive Environment and Efficiency Approach . . . . . . . 11
2.5.4 Agency Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.6 Literature Review on Regulatory Reforms and Profitability . . . . . . . 12
2.6.1 International Literature Review . . . . . . . . . . . . . . . . . . 12




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, 2.6.2 Evidence on Regulatory Reforms in Emerging Markets, specifi-
cally in India . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.7 Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

3 RESEARCH METHODOLOGY 15
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.2 Research Philosophy . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.3 Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.4 Data Sources and Collection . . . . . . . . . . . . . . . . . . . . . . . 17
3.4.1 Quantitative Data Sources (Panel Data) . . . . . . . . . . . . . 17
3.5 Sampling Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.5.1 Sampling of Quantitative Data (Financial Institutions) . . . . . . 18
3.5.2 Qualitative Sample Selection . . . . . . . . . . . . . . . . . . . 19
3.5.3 Control Variables . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.5.4 Mediating/Moderating Variables (Qualitative) . . . . . . . . . . 20
3.6 Analytical Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.6.1 Quantitative Data Analysis (Econometric Models) . . . . . . . . 21
3.6.2 Qualitative Data Analysis (Thematic Analysis) . . . . . . . . . 23
3.7 Reliability and Validity . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.7.1 Reliability and Validity of Quantitative Data . . . . . . . . . . . 24
3.7.2 Trustworthiness of Qualitative Data . . . . . . . . . . . . . . . 25
3.8 Ethical Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . 27
3.9 Summary of Chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

4 DATA ANALYSIS AND INTERPRETATION 29
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
4.2 Description of Variables in Quantitative Analysis . . . . . . . . . . . . 29
4.2.1 Profitability Metrics (Dependent Variables) . . . . . . . . . . . 29
4.2.2 Regulatory Reform Variables (Independent Variables) . . . . . . 31
4.2.3 Control Variables . . . . . . . . . . . . . . . . . . . . . . . . . 32


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, 4.3 Correlation Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.4 Econometric Analysis and Hypothesis Testing . . . . . . . . . . . . . . 34
4.4.1 Model Specification and Diagnostic Tests . . . . . . . . . . . . 34
4.4.2 Impact of Regulatory Reforms on ROA . . . . . . . . . . . . . 36
4.4.3 Impact of Regulatory Reforms on ROE . . . . . . . . . . . . . 38
4.4.4 Impact of Regulatory Reforms on NIM . . . . . . . . . . . . . 39
4.4.5 Heterogeneity Analysis (Hypothesis 3) . . . . . . . . . . . . . . 41
4.4.6 Mediating/Moderating Factors (Hypothesis 4) . . . . . . . . . . 43
4.5 Thematic Analysis of Qualitative Data . . . . . . . . . . . . . . . . . . 44
4.5.1 Theme 1: The Two-Sided Edge of Capital Requirement . . . . . 44
4.5.2 Theme 2: Liquidity Management as a Profitability Challenge . . 45
4.5.3 Theme 3: Asset Quality Regulation: A Two-Edged Sword for
PSBs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
4.5.4 Theme 4: Macroeconomic Environment: Critical Moderator Factor 46
4.5.5 Theme 5: Strategic Adaptations and Regulatory Arbitrage (Un-
intended Consequences) . . . . . . . . . . . . . . . . . . . . . 47
4.6 Summary of Findings and Hypothesis Review . . . . . . . . . . . . . . 47
4.6.1 Hypothesis 1: Impact of Capital Adequacy . . . . . . . . . . . . 48
4.6.2 Hypothesis 2: Impact of Liquidity Standards . . . . . . . . . . . 48
4.6.3 Hypothesis 3: Heterogeneity of Impact . . . . . . . . . . . . . . 48
4.6.4 Hypothesis 4: Moderating Role of Macroeconomic Factors . . . 49
4.6.5 Overall Trends and Research Questions Summary . . . . . . . . 49
4.7 Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

5 FINDINGS, CONCLUSION AND RECOMMENDATIONS 52
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
5.2 Summary of Key Findings . . . . . . . . . . . . . . . . . . . . . . . . 52
5.2.1 Impact of Regulatory Reforms on Profitability Metrics . . . . . 52
5.2.2 Heterogeneity of Impact Across Institutions . . . . . . . . . . . 53
5.2.3 Moderating Role of Macroeconomic Factors . . . . . . . . . . . 54

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