| Bank is an important component of modern financial system and it plays important roles in prospering macro economy and improving social welfare. Steady and efficient banking system can gather maximum social capital and allocate it to the most active economic sectors so as to improve the quality and efficiency of economic growth. When bank risk is controllable. How to improve bank supervision and realize its efficient and steady operation has been studied by economics and supervision authorities for nearly one hundred years. Though bank supervision agencies of numerous countries aim to realize efficient and steady operation of banks, safeguard rights and interests of consumers and achieve benign operation of national economy and wish to realize above objectives by strengthening bank supervision, actual supervision effects are not satisfactory. In particular, supervision problems found in 2008 global financial crisis cause all walks of life to reflect current bank supervision system and policy. So, the empirical research on the effectiveness of bank supervision has important meaning to improve framework of supervision policy and realize steady and efficient operation of banks. On the basis of theoretical analysis, this paper built comprehensive cross-border banking industry’s database and bank supervision database and conducted empirical test on effectiveness of bank supervision in three dimensions: competition, efficiency and risks as well as test on relationship of prudential supervision in China with bank efficiency and risks.First of all, based on related data of global 128 countries from 1998 to 2010, this paper adopted Lerner index and Boone index to measure bank competition and conduct empirical research on the relationship between bank regulation and bank competition. The results show: during sampling period, the market power of global banking industry was under volatile rising trend in general, but it was declined obviously during the period of financial crisis occurring in 2008 and the degree of bank competition in developed countries was higher than that of developing countries. Capital supervision policy significantly improves the degree of bank competition; but operation restrictions, market supervision and governmental supervision power can enhance bank monopolistic force and weaken bank competition. In addition, we also found in our research: monopolistic banking structure and higher net interest margin weaken bank competition, development of insurance industry facilitates bank competition and the development of stock market and non-interest business of banks increase the market power of banks.Secondly, based on micro data of 1024 banks of 121 countries from 2000 to 2010, this paper took DEA model to estimate bank efficiency and conducted empirical research on the relationship between bank supervision and bank efficiency. Our research shows: in countries with stricter capital requirement and stronger governmental supervision power, banking efficiency is higher, namely capital supervision and governmental supervision power is conducive to improve bank efficiency. In countries with stricter restrictions on operating activities of banks and stricter demands on disclosure of information of banks to market, banking efficiency is usually lower, as operating restrictions and market supervision significantly decline bank efficiency. When political system, legal environment, governmental rule by law and other state systems’ quality difference is controlled, the above research results will not have any change so that our research conclusions are robust.Next, based on panel data of cross-border banking industry from 2000 to 2010, this paper adopted Z value and non-performing loan rate to measure operating risks and credit risks of bank and we conducted empirical research on relation between bank supervision and bank risks. Meanwhile, we also further surveyed whether the relation will be changed under different political environment, legal level and governmental governance levels, namely whether the influence of the same bank supervision on bank risks under different institutional quality is heterogeneous or not. Our results show that restrictions on operating activities of banks will not only significantly reduce their operating risks and credit risks, but also be advantageous to drive stability of banks. However, risk restraint effects of operating restrictions depend on certain institutional level. When institutional level of one country exceeds certain threshold, operating restrictions will reduce risks of bank; otherwise, it will increase risks of banks. Institutional index of most sampling economies exceeds the threshold value and operating restrictions are conducive to reduce risks of banks in general. Uncertain influence of market supervision to risks of banks is advantageous to reduce credit risks of banks, but it will increase overall operating risks of banks. Influence of capital supervision and governmental supervision to banks’ operating risks and credit risks is not significant, but capital supervision and institutional quality have obvious alternation effects in reduction of risks. Improvement of institutional quality is beneficial to enhance governmental supervision on risk restraint effects of bank credit. In general, the influence of bank supervision on bank risks is heterogeneous in economies under different institutional levels.Finally, based on micro data of 18 commercial banks of China from 2007 to 2013, this paper adopted stochastic frontier production function and non-efficiency model’s joint estimation method to conduct empirical analysis on the relationship between prudential supervision tool in China and cost efficiency and profit efficiency of banks. Meanwhile, we also used GMM model to study on the relationship between prudential supervision tools in China and cost efficiency and bank risks. Our research shows higher capital adequacy ratio will reduce cost efficiency and profit efficiency of banks while reducing credit risks of banks; and increasing provision coverage is conducive to reduce credit risks of banks, but it will significantly improve cost effectiveness of banks. The influence of lever ratio and loan provision rate to profit efficiency of banks is positive, but loan provision rate will increase risks of banks. Supervision of loan-to-deposit ratio cannot reduce credit risks or operating risks of banks, but to obviously increase cost efficiency and profit efficiency. The influence of liquidity ratio to bank risks and efficiency is not significant. All of these conclusions show that the influence of different prudential supervision tools to bank risks and efficiency is different. Some prudential supervision tools will lower banking efficiency while reducing risks of bank, and therefore the objective of prudential supervision is selected between efficiency and risks.
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