Working Paper: NBER ID: w9323
Authors: James R. Barth; Gerard Caprio Jr.; Ross Levine
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.
Keywords: bank regulation; bank supervision; banking sector development; banking performance; banking stability
JEL Codes: G21; G38; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regulatory restrictions on bank activities (G28) | increased fragility (F12) |
| regulatory restrictions on bank activities (G28) | reduced efficiency in the banking sector (G21) |
| excessive restrictions (D45) | higher probability of banking crises (F65) |
| regulations on domestic and foreign bank entry (G28) | bank development (G21) |
| regulations on domestic and foreign bank entry (G28) | bank performance (G21) |
| capital adequacy regulations (G28) | risk-taking behavior (D91) |
| poorly designed deposit insurance schemes (G28) | excessive risk-taking (G41) |
| effective supervision and regulatory frameworks (G38) | better banking outcomes (G21) |