Abstract
This paper uses our new database on bank regulation and supervision in 107 countries to assess the relationship between specific regulatory and supervisory practices and banking-sector development, efficiency, and fragility. The paper examines: (i) regulatory restrictions on bank activities and the mixing of banking and commerce; (ii) regulations on domestic and foreign bank entry; (iii) regulations on capital adequacy; (iv) deposit insurance system design features; (v) supervisory power, independence, and resources; (vi) loan classification stringency, provisioning standards, and diversification guidelines; (vii) regulations fostering information disclosure and private-sector monitoring of banks; and (viii) government ownership. The results, albeit tentative, raise a cautionary flag regarding government policies that rely excessively on direct government supervision and regulation of bank activities. The findings instead suggest that policies that rely on guidelines that (1) force accurate information disclosure, (2) empower private-sector corporate control of banks, and (3) foster incentives for private agents to exert corporate control work best to promote bank development, performance and stability.
Highlights
The staggering scope of recent banking crises coupled with strong evidence on the beneficial effects of well-functioning banking systems for economic growth underscore current efforts to reform bank regulation and supervision.1 In January 2001, the Basel Committee on Banking Supervision issued a proposal for a Basel II Capital Accord that, once finalized, will replace the 1988 Basel I Capital Accord
Given that this paper introduces a new database on bank regulation and supervision, it is natural to provide a first assessment of which regulations and supervisory practices are associated with successful outcomes across countries
We examine the relationship between deposit insurance and bank development and efficiency and assess whether this relationship depends on the extent of capital regulations, official supervisory powers, regulatory restrictions on bank activities, and on the extent to which private-sector monitoring of banks is promoted
Summary
The staggering scope of recent banking crises coupled with strong evidence on the beneficial effects of well-functioning banking systems for economic growth underscore current efforts to reform bank regulation and supervision. In January 2001, the Basel Committee on Banking Supervision issued a proposal for a Basel II Capital Accord that, once finalized, will replace the 1988 Basel I Capital Accord. We discuss the theoretical predictions surrounding each of the regulations and supervisory practices noted above in subsequent sections and empirically examine its relationship to bank development, performance and stability. While capital requirements are the mainstay of current approaches to bank regulation and supervision, theory predicts that such requirements are beneficial when (i) generous deposit insurance distorts incentives, (ii) official supervision is weak, and (iii) complex banks are difficult to monitor For these reasons, analyses of individual regulations and supervisory practices should incorporate interaction terms to assess the efficacy of each one in the presence of others. Others argue that governments act in their own interests and frequently do not ameliorate market failures (Shleifer and Vishny, 1998) According to this view, regulations that empower the private-sector to monitor banks will be more effective than direct government interventions at enhancing bank performance and stability.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
