Exploring The Relationship Between Prudential Regulation and Bank Efficiency in the WAEMU Zone

This study empirically analyzes the impact of prudential regulation on banking efficiency in the West African Economic and Monetary Union (WAEMU). We use panel data from 98 banks between 1998-2019 and employ the System GMM estimator to examine the relationship between prudential measures and bank efficiency, measured by two indicators: cost-to-income (CSTINC) and Malmquist Index based on Data Envelopment Analysis. Our findings indicate that prudential regulations related to Loan loss provisions (LLPR), Capital requirements (CAP), Loan restrictions (LOANR), and Leverage limits (LLV) positively affect bank efficiency, whereas Liquidity requirements (LIQ) have a negative impact. Our results show that larger banks benefit from higher capital requirements and loan loss provisions, while small banks are negatively affected. Additionally, low-risk banks become less efficient when prudential measures related to Loan restrictions (LOANR), Loan loss provisions (LLPR), Leverage limits (LLV), and Liquidity requirements (LIQ) are tightened. We conclude that prudential regulation must be appropriately calibrated and tailored to bank and country-specific characteristics to promote banking efficiency and ensure the stability of the banking system in the WAEMU zone