Revisiting the effect of regulation, supervision and risk on banking performance : Evidence from European banks based on PSTR model

Purpose – This paper aims to present an analysis of how regulatory and supervisory policies affect risk-performance nexus. Design/methodology/approach – Empirically, on a sample of 60 large European banks over the period 2005-2011, the authors explore this relationship by using the panel smooth transition regression (PSTR) modeling because the nexus between risk and performance is nonlinear and it depends on specific national factors especially regulatory and supervisory policies. Findings – The major finding of this study is that the effect of risk on banking performance is conditional by the improvement of banking governance in Europe. Practical implications – The PSTR helps to account for a change of regime in the effects of risk on performance. Originality/value – This paper explains the use of PSTR modeling.