1. Introduction

The banking system around the globe has in recent years gone through some of the most intense criticism and scrutiny. In part many believe the lack of regulations and supervisory structures have brought the world to the brink of financial collapse, while on the opposite side of that coin many believed the years of prosperity the world had experienced just prior to the collapse were largely due to deregulation or lack of regulation, hence a near free market with regard to the financial sector (Reinhart and Rogoff, 2008; Brunnermeier & Pederson, 2009). Could there possibly be better efficiency and possibly profitability where a properly implemented regulatory and supervisory framework is in place? Would evidence suggest so? This paper will try to resolve some of the myths by providing empirical support.

Banking regulations can generally be defined as the frameworks controlling the creation, operation and liquidation of banks in an economy. These regulations are put in place by Central Banks and finance ministries and the control is exerted usually through monitoring carried out by specialized banking supervisory authorities. Spong (2000) from the Federal Reserve Bank of Kansas City highlights a few important reasons for introducing bank regulations. The most basic reason for introducing regulations is to protect depositors from undue risks to their deposits. Businesses and individuals alike hold significant portions of their funds in banks and there are valid concerns from them with regard to protection of their funds. As a result, authorities respond to such concerns with regulations attempting to protect the bank depositors.

Meanwhile, with enormous amounts of transactions conducted daily by businesses and individuals, a stable framework is required to ensure that smooth and acceptable methods of the payments system are in place in an economy. Bank regulations try to provide this stable framework which seeks to assure certainty and safety to users of the banking payment system which is critical for the wellbeing of the economy. Moreover, apart from maintaining public confidence, banking regulations also try to create a regulatory environment where banks are expected to be efficient and competitive; and are also expected to provide reasonable levels of banking services throughout the economy.