IDEAS home Printed from https://ideas.repec.org/a/mbr/jmonec/v6y2012i2p191-209.html
   My bibliography  Save this article

The Impact of Regulation on Soundness of Banking: A Panel Data Approach

Author

Listed:
  • Shahchera , Mahshid

    (Monetary and Banking Research Institute (MBRI), Central Bank of the Islamic Republic of Iran (CBI))

  • Jouzdani , Nasim

    (Sanaie Higher Education Institution of Isfahan)

Abstract

The recent financial crisis has shown that the reforming in regulation and supervision is essential. This paper studies whether banking regulation improves bank soundness or more regulation lead to decrease soundness of banking. Specifically, countries which require banks to report regularly and accurately their financial data to regulators and market participants have sounder banks. In this paper, we test the quadratic relationship between regulation and sound banking with a panel data model during (2000-2009) for selected countries. The dependent variable in the study is the bank's financial soundness as measured by its Z-score. These findings emphasize the importance of regulation on banking system. The results show that regulation and financial soundness have significantly quadratic form because the sign of regulation-squared coefficient is negative and sign of coefficient of regulation is positive and significant, it could be said that quadratic hypothesis of above relationship can't be rejected.

Suggested Citation

  • Shahchera , Mahshid & Jouzdani , Nasim, 2012. "The Impact of Regulation on Soundness of Banking: A Panel Data Approach," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 6(2), pages 191-209, December.
    • Handle: RePEc:mbr:jmonec:v:6:y:2012:i:2:p:191-209
    as

    Download full text from publisher

    File URL: http://jme.mbri.ac.ir/article-1-75-en.pdf
    Download Restriction: no
    File URL: http://jme.mbri.ac.ir/article-1-75-en.html
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Barth,James R. & Caprio,Gerard & Levine,Ross, 2008. "Rethinking Bank Regulation," Cambridge Books, Cambridge University Press, number 9780521709309.
    2. Martin Čihák & Alexander Tieman, 2011. "Quality of Financial Sector Regulation and Supervision Around the World," Chapters, in: Sylvester Eijffinger & Donato Masciandaro (ed.), Handbook of Central Banking, Financial Regulation and Supervision, chapter 15, Edward Elgar Publishing.
    3. Demirgüç-Kunt, AslI & Detragiache, Enrica & Tressel, Thierry, 2008. "Banking on the principles: Compliance with Basel Core Principles and bank soundness," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 511-542, October.
    4. Mr. Udaibir S Das & Mr. Plamen Yossifov & Richard Podpiera & Mr. Dmitriy L Rozhkov, 2005. "Quality of Financial Policies and Financial System Stress," IMF Working Papers 2005/173, International Monetary Fund.
    5. James R. Barth & Gerard Caprio Jr. & Ross Levine, 2001. "Banking Systems around the Globe: Do Regulation and Ownership Affect Performance and Stability?," NBER Chapters, in: Prudential Supervision: What Works and What Doesn't, pages 31-96, National Bureau of Economic Research, Inc.
    6. Enrico C. Perotti, 2005. "Dominant Investors and Strategic Transparency," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 21(1), pages 76-102, April.
    7. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
    8. John H. Boyd & Chun Chang & Bruce Smith, 1998. "Moral hazard under commercial and universal banking," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-471.
    9. Demirguc-Kunt, Asli & Detragiache, Enrica, 2002. "Does deposit insurance increase banking system stability? An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1373-1406, October.
    10. Boyd, John H. & Runkle, David E., 1993. "Size and performance of banking firms : Testing the predictions of theory," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 47-67, February.
    11. Barth, James R.*Caprio,Gerard*Levine, Ross, 2001. "The regulation and supervision of banks around the world - a new database," Policy Research Working Paper Series 2588, The World Bank.
    12. Uhde, André & Heimeshoff, Ulrich, 2009. "Consolidation in banking and financial stability in Europe: Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1299-1311, July.
    13. Franklin Allen & Richard Herring, 2001. "Banking Regulation versus Securities Market Regulation," Center for Financial Institutions Working Papers 01-29, Wharton School Center for Financial Institutions, University of Pennsylvania.
    14. John, Kose & John, Teresa A. & Saunders, Anthony, 1994. "Universal banking and firm risk-taking," Journal of Banking & Finance, Elsevier, vol. 18(2), pages 307-323, January.
    15. Mr. Dewitt D Marston, 2001. "Financial System Standards and Financial Stability: The Case of the Basel Core Principles," IMF Working Papers 2001/062, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Demirgüç-Kunt, Asli & Detragiache, Enrica, 2011. "Basel Core Principles and bank soundness: Does compliance matter?," Journal of Financial Stability, Elsevier, vol. 7(4), pages 179-190, December.
    2. Demirgüç-Kunt, AslI & Detragiache, Enrica & Tressel, Thierry, 2008. "Banking on the principles: Compliance with Basel Core Principles and bank soundness," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 511-542, October.
    3. Asli Demirgüç-Kunt & Ms. Enrica Detragiache, 2010. "Basel Core Principles and Bank Risk: Does Compliance Matter?," IMF Working Papers 2010/081, International Monetary Fund.
    4. Agoraki, Maria-Eleni K. & Delis, Manthos D. & Pasiouras, Fotios, 2011. "Regulations, competition and bank risk-taking in transition countries," Journal of Financial Stability, Elsevier, vol. 7(1), pages 38-48, January.
    5. Hsing-Chin Hsiao & Mei-Hwa Lin, 2013. "Taiwan second financial restructuring and commercial bank productivity growth," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 12(4), pages 327-350, October.
    6. Pasiouras, Fotios & Tanna, Sailesh & Zopounidis, Constantin, 2009. "The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence," International Review of Financial Analysis, Elsevier, vol. 18(5), pages 294-302, December.
    7. Hoque, Hafiz & Andriosopoulos, Dimitris & Andriosopoulos, Kostas & Douady, Raphael, 2015. "Bank regulation, risk and return: Evidence from the credit and sovereign debt crises," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 455-474.
    8. Al-Shboul, Mohammad & Maghyereh, Aktham & Hassan, Abul & Molyneux, Phillip, 2020. "Political risk and bank stability in the Middle East and North Africa region," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).
    9. Swamy, Vighneswara, 2014. "Bank regulation, supervision and efficiency during the global financial crisis," MPRA Paper 58295, University Library of Munich, Germany.
    10. Delis, Manthos D & Staikouras, Panagiotis, 2009. "On-site audits, sanctions, and bank risk-taking: An empirical overture towards a novel regulatory and supervisory philosophy," MPRA Paper 16836, University Library of Munich, Germany.
    11. Ayadi, Rym & Naceur, Sami Ben & Casu, Barbara & Quinn, Barry, 2016. "Does Basel compliance matter for bank performance?," Journal of Financial Stability, Elsevier, vol. 23(C), pages 15-32.
    12. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2014. "Institutional development and bank stability: Evidence from transition countries," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 160-176.
    13. Ongena, Steven & Popov, Alexander & Udell, Gregory F., 2013. "“When the cat's away the mice will play”: Does regulation at home affect bank risk-taking abroad?," Journal of Financial Economics, Elsevier, vol. 108(3), pages 727-750.
    14. Fang, Yiwei & Fornaro, James & Li, Lingxiang & Zhu, Yun, 2018. "The impact of accounting laws and standards on bank risks: Evidence from transition countries," Journal of Economics and Business, Elsevier, vol. 95(C), pages 103-118.
    15. Maghyereh, Aktham I. & Awartani, Basel, 2014. "Bank distress prediction: Empirical evidence from the Gulf Cooperation Council countries," Research in International Business and Finance, Elsevier, vol. 30(C), pages 126-147.
    16. Mohammad Bitar & Sami Ben Naceur & Rym Ayadi & Thomas Walker, 2021. "Basel Compliance and Financial Stability: Evidence from Islamic Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 60(1), pages 81-134, August.
    17. Noman, Abu Hanifa Md. & Gee, Chan Sok & Isa, Che Ruhana, 2018. "Does bank regulation matter on the relationship between competition and financial stability? Evidence from Southeast Asian countries," Pacific-Basin Finance Journal, Elsevier, vol. 48(C), pages 144-161.
    18. Delis, Manthos D & Molyneux, Philip & Pasiouras, Fotios, 2009. "Regulations and productivity growth in banking," MPRA Paper 13891, University Library of Munich, Germany.
    19. repec:zbw:bofrdp:2011_007 is not listed on IDEAS
    20. Barth, James R. & Caprio, Gerard Jr. & Levine, Ross, 2004. "Bank regulation and supervision: what works best?," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 205-248, April.
    21. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2011. "Market reforms, legal changes and bank risk-taking: evidence from transition economies," Bank of Finland Research Discussion Papers 7/2011, Bank of Finland.

    More about this item

    Keywords

    Bank Soundness; Banking Regulation and Supervision; Z-score;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • K2 - Law and Economics - - Regulation and Business Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mbr:jmonec:v:6:y:2012:i:2:p:191-209. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: M. E. (email available below). General contact details of provider: https://edirc.repec.org/data/mbcbiir.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.