The impact of regulatory measures on commercial banks' profitability: The Barbadian case

Where financial regulations are in place within an economic system, they will impact greatly on the efficiency as well as the structure of financial intermediation. Though this is true, commercial banks in their role as intermediaries ensure the transmission of funds from surplus to deficit units and select the projects and firms to be financed from various alternatives. Financial regulation can be classified into groups according to their aims and functions, most commonly: structural, prudential and monetary. Regulations impact on the very structure of the banking system since they present the stipulations and restrictions that must be considered in the banks’ entire series of operations. But in terms of optimality, it remains to be answered whether all the restrictions in place are necessary. Measures such as interest rate ceilings and floors, exchange and credit controls, and reserve requirement are typical tools for the Central Banks to use in their effort to regulate the banks. The extent to which banks become involved in risky projects or investments influences the probability of bank failures on the one hand, and the viability and structure of the banking system on the other. An overview of Regulations of Barbados is presented and analysed using quarterly data from the period January 1986-December 1999, followed by econometric results and policy implications.