Decomposing recapitalization policy effects on banking efficiencies: a regulatory life cycle theory approach in Ghana

This study applies the regulatory life cycle theory to decompose the effects of the various stages of recapitalization regulations on bank efficiency types in an emerging African economy. Using data from 30 banks operating in Ghana over the period from 2000 to 2020 and applying Tobit and OLS models, we examine the relationship between recapitalization stages and banking efficiencies. The results show that various recapitalization stages affect banking efficiency differently. Specifically, (i) the pre-recapitalization stage dampens technical and scale efficiencies while positively affecting bank revenue and profits, (ii) the during-recapitalization stage leads to positive effects on scale efficiency and (iii) post-recapitalization has positive effects on technical and pure-technical efficiency. The results show that recapitalization regulation must be seen as a process and not a one-off occurrence to help financial sector stakeholders understand the various effects and effectively manage the recapitalization regulation process. The results suggest that bank managers can rely on some stages of the recapitalization process to enhance efficiency, while mitigating the adverse effects of pre-recapitalization on technical and scale efficiencies. This study extends the application of the regulatory life cycle theory to show that recapitalization regulation is a process with varying effects on the outcomes of banking efficiency.