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Bankingon the Principles

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Author Info

  • Enrica Detragiache
  • Thierry Tressel
  • Asli Demirgüç-Kunt

Abstract

This paper studies whether compliance with the Basel Core Principles for Effective Banking Supervision (BCPs) improves bank soundness. The authors find a significant and positive relationship between bank soundness (measured with Moody''s financial strength ratings) and compliance with principles related to information provision2. Specifically, countries that require banks to regularly and accurately report their financial data to regulators and market participants have sounder banks. This relationship is robust to controlling for broad indexes of institutional quality, macroeconomic variables, sovereign ratings, and reverse causality. Measuring soundness through Z-scores yields similar results. These findings emphasize the importance of transparency in making supervisory processes effective and strengthening market discipline. Countries aiming to upgrade banking regulation and supervision should consider giving priority to information provision over other elements of the core principles.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/242.

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Length: 33
Date of creation: 01 Oct 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/242

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Related research

Keywords: Bank soundness; Basel Core Principles; Bank supervision; banking; bank ratings; statistics; correlations; correlation; standard deviation; financial statistics; banking supervision; financial strength; survey; bank rating; return on equity; return on assets; banking supervisors; instrumental variables; bank regulation; banking crises; bank management; bank fragility; banking regulation; confidence intervals; banking institutions; dummy variable; bank regulators; deposit insurance; banking system; capital adequacy; standard error; bank assets; bank size; bank solvency; bank ownership; bank performance; banking market; descriptive statistics; consolidated supervision; bank supervisors; statistic; bank balance sheet; bank stock; prudential regulation; subordinated debt; banking industry; standard deviations; explanatory power; sample mean; empirical model; bank insolvencies; banking sector; income statement; internal management information; bank market; sample size; bank market discipline; banking systems; banking sector fragility; outliers; confidence interval; numerical values; time series; logarithm; statistical significance; prudential requirement; banking laws; measurement error; bank portfolios; internal control; standard errors; capital regulation; state owned bank; bank equity; dummy variables; banking supervisory agency; bank distress; bank stability; banking license; bank crisis; bank loans;

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References

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  1. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," NBER Working Papers 10568, National Bureau of Economic Research, Inc.
  2. Andrea Sironi, 2000. "Testing for market discipline in the European banking industry: evidence from subordinated debt issues," Finance and Economics Discussion Series 2000-40, Board of Governors of the Federal Reserve System (U.S.).
  3. Barth, James R. & Caprio Jr, 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.
  4. Billett, Matthew T. & Garfinkel, Jon A. & O'Neal, Edward S., 1998. "The cost of market versus regulatory discipline in banking," Journal of Financial Economics, Elsevier, vol. 48(3), pages 333-358, June.
  5. Gelos, Gaston & Wei, Shang-Jin, 2004. "Transparency and International Portfolio Holdings," CEPR Discussion Papers 4476, C.E.P.R. Discussion Papers.
  6. Andrew Feltenstein & Roger Lagunoff, 2003. "International versus Domestic Auditing of Bank Solvency," Working Papers gueconwpa~03-03-08, Georgetown University, Department of Economics.
  7. Yongseok Shin & Rachel Glennerster, 2003. "Is Transparency Good for You, and Can the IMF Help?," IMF Working Papers 03/132, International Monetary Fund.
  8. Demirguc-Kunt, Asli & Detragiache, Enrica, 2005. "Cross-country empirical studies of systemic bank distress : a survey," Policy Research Working Paper Series 3719, The World Bank.
  9. Alejandro Micco & Ugo Panizza & Mónica Yañez, 2004. "Bank Ownership and Performance," IDB Publications 6685, Inter-American Development Bank.
  10. Richard Podpiera, 2004. "Does Compliance with Basel Core Principles Bring Any Measurable Benefits?," IMF Working Papers 04/204, International Monetary Fund.
  11. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2002. "Law, Endowment, and Finance," NBER Working Papers 9089, National Bureau of Economic Research, Inc.
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  13. Gropp, Reint & Richards, Anthony J., 2001. "Rating agency actions and the pricing of debt and equity of European banks: What can we infer about private sector monitoring of bank soundness?," Working Paper Series 0076, European Central Bank.
  14. Patel, Sandeep A. & Balic, Amra & Bwakira, Liliane, 2002. "Measuring transparency and disclosure at firm-level in emerging markets," Emerging Markets Review, Elsevier, vol. 3(4), pages 325-337, December.
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  16. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, vol. 71(4), pages 1027-1048, 07.
  17. 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.
  18. Anthony J. Richards & David Deddouche, 1999. "Bank Rating Changes and Bank Stock Returns," IMF Working Papers 99/151, International Monetary Fund.
  19. David Marston, 2001. "Financial System Standards and Financial Stability," IMF Working Papers 01/62, International Monetary Fund.
  20. Udaibir S. Das & Plamen Yossifov & Richard Podpiera & Dmitriy Rozhkov, 2005. "Quality of Financial Policies and Financial System Stress," IMF Working Papers 05/173, International Monetary Fund.
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Citations

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Cited by:
  1. International Monetary Fund, 2010. "Post-Crisis Bank Behavior," IMF Working Papers 10/1, International Monetary Fund.
  2. Giampaolo Gabbi & Paola Musile Tanzi & Loris Nadotti, 2011. "Firm size and compliance costs asymmetries in the investment services," Journal of Financial Regulation and Compliance, Emerald Group Publishing, vol. 19(1), pages 58-74, February.
  3. Fotios Pasiouras, 2008. "International evidence on the impact of regulations and supervision on banks’ technical efficiency: an application of two-stage data envelopment analysis," Review of Quantitative Finance and Accounting, Springer, vol. 30(2), pages 187-223, February.
  4. Demirguc-Kunt, Asli, 2006. "Finance and economic development : policy choices for developing countries," Policy Research Working Paper Series 3955, The World Bank.
  5. TCHANA TCHANA, Fulbert, 2008. "Regulation and Banking Stability: A Survey of Empirical Studies," MPRA Paper 9298, University Library of Munich, Germany, revised 30 May 2008.
  6. Shehzad, Choudhry Tanveer & de Haan, Jakob & Scholtens, Bert, 2010. "The impact of bank ownership concentration on impaired loans and capital adequacy," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 399-408, February.
  7. Holopainen, Helena, 2007. "Integration of financial supervision," Research Discussion Papers 12/2007, Bank of Finland.
  8. Martin CIHAK, 2007. "Systemic Loss: A Measure of Financial Stability (in English)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(1-2), pages 5-26, March.

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