What is the net effect of financial liberalization on bank productivity? A decomposition analysis of bank total factor productivity growth

We employ a unique framework to quantify the net effect of financial liberalization on banks’ total factor productivity (TFP) growth through a decomposition analysis of two effects: a positive direct effect of financial liberalization on bank TFP growth; and a negative indirect effect operating through a higher propensity to systemic banking crisis. The empirical decomposition is based on a sample of 1,530 banks operating in 88 countries over the period 1999-2011. We find that the net effect of financial liberalization on bank TFP growth is positive: the direct positive effect outweighs the negative one. An important policy implication flows from these findings.