The Impact of Regulatory Reforms on Bank Profitability: Evidence from Post-Financial Crisis Era

Abstract

This review research paper investigates the dynamic relationship between regulatory reforms and bank profitability in the post-financial crisis era. The aftermath of the 2008 global financial crisis prompted significant regulatory changes globally, with the aim of fortifying the banking sector and preventing future systemic failures. This paper synthesizes empirical evidence to discern the impact of these regulatory reforms on bank profitability, offering insights into the nuanced interactions between regulatory frameworks and financial institutions. The review begins by contextualizing the regulatory landscape post-2008, outlining key reforms such as Basel III, Dodd-Frank Act, and other jurisdiction-specific initiatives. It provides a comprehensive overview of the structural and prudential measures implemented to enhance financial stability, transparency, and risk management within the banking sector. Subsequently, the paper synthesizes empirical studies that assess the impact of regulatory reforms on various dimensions of bank profitability. It explores how changes in capital adequacy requirements, liquidity standards, and risk management practices influence net interest margins, return on assets, and return on equity. The analysis also considers the role of regulatory compliance costs and the potential trade-offs between increased stability and reduced profitability. Furthermore, the review addresses the heterogeneity in the impact of regulatory reforms across different types of banks, including large systemically important institutions and smaller regional banks. It investigates how the regulatory environment interacts with bank-specific characteristics, business models, and risk profiles, shaping the overall profitability dynamics within the banking industry. The paper concludes by synthesizing the main findings, identifying gaps in the existing literature, and suggesting avenues for future research. By shedding light on the intricate relationship between regulatory reforms and bank profitability, this review contributes to the ongoing discourse on the effectiveness and unintended consequences of post-financial crisis regulatory measures.