Role of Regulatory Governance in Financial Stability: A Comparison of High and Low Income Countries

Saif Ullah,Sayed Irshad Hussain,Agha Amad Nabi,Khurram Ali Mubashir

doi:10.2478/jcbtp-2022-0009

Abstract

Abstract This study explores the effect of regulatory governance on financial stability using cross-sectional data from 55 countries. The findings show that regulatory governance and various subcomponents of regulatory governance are positively correlated with financial stability in the selected countries. The results, based on the ordinary least square method, explain that the regulatory governance has a significant positive influence on financial stability in the selected countries. Further, concerning different dimensions of regulatory governance, it is showed that an individual impact of all components on financial stability is positive except for the strength of external audit, and supervisory independence and accountability. However, central bank`s independence and economic independence have a statistically significant effect on financial stability, whereas central bank accountability, supervisory independence and accountability, political central bank independence as well as the strength of external audit have an insignificant statistical influence on financial stability. Finally, the study concludes that regulatory governance and individual dimension of regulatory governance played the most significant role in improving financial stability in the selected countries.

Highlights

The theory of financial stability can be traced back in pioneer work of Keynes (1936) and Minsky (1985) who tried to explore reasons of financial crises and concluded that the financial system is fragile
Regulatory governance is comprised of six different dimensions, including the central bank independence index, central bank accountability, and index of the strength of external audit, index of economic central bank independence, index of supervisory independence and accountability and index of political central bank independence
Further decomposition of regulatory governance into various components, the analyses show an individual impact of all components on financial stability is positive except for the strength of external audit, and supervisory independence and accountability

Summary

Introduction

The theory of financial stability can be traced back in pioneer work of Keynes (1936) and Minsky (1985) who tried to explore reasons of financial crises and concluded that the financial system is fragile. Financial stability can be defined as characteristics of the financial system to manage risk efficiently, allocate resources efficiently, and absorb shock (Houben, Kakes, & Schinasi, 2004). Financial crises unveiled much weakness in developed as well as many emerging countries (Cornand & Gimet, 2012). The regulators were unable to control excessive risk-taking practices of banks before the financial crisis. Global financial stability report (2018) warned that supervisors and regulators of financial sectors should remain attentive as new threats to financial stability are emerging

Methods

Results

Conclusion