The Impact of Prudential Supervision on Financial Performance of Financial Industry: Take Commercial Banks as The Case Study

Abstract

Prudential supervision is the inevitable choice for the sustainable and steady development of commercial banks. This paper uses panel data of 22 “A-share” listed commercial banks from 2014 to 2020 to measure total factor productivity to represent financial performance of commercial banks, and uses systematic generalized method of moments (GMM) estimation method to empirically investigate the impact of major prudential supervision tools on financial performance of Chinese commercial banks. The study finds that the total factor productivity of commercial banks has experienced a decline and then a rise. The capital adequacy ratio and leverage ratio in prudential supervision instruments significantly promote the financial performance of commercial banks, while liquidity ratio and loan provision ratio have significant negative effects on the financial performance of commercial banks.