Liberalizing a Regulated Banking System: The Caribbean Case

This work argues that monetary controls impact adversely on commercial bank performance and on banks' market share, and that simultaneous implementation of monetary and prudential regulation can undermine objectives on monetary stability and growth of the banking system. Typically, those monetary measures most frequently applied to protect the balance of payments, force cost adjustments and non-optimal portfolio realignments which stymie commercial bank performance. However, liberalization, though inevitable, can frustrate macroeconomic objectives. The author of this work formulates a model to test the impact of monetary and prudential regulation on bank performance. The model derives regulation and performance indices using data from three Caribbean countries, but can be applied in any country irrespective of size.