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The Empirics of Banking Regulation

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  • TCHANA TCHANA, Fulbert

Abstract

This paper assesses empirically whether banking regulation is effective at preventing banking crises. We use a monthly index of banking system fragility, which captures almost every source of risk in the banking system, to estimate the effect of regulatory measures (entry restriction, reserve requirement, deposit insurance, and capital adequacy requirement) on banking stability in the context of a Markov-switching model. We apply this method to the Indonesian banking system, which has been subject to several regulatory changes over the last couple of decades, and at the same time, has experienced a severe systemic crisis. We draw from this research the following findings: (i) entry restriction reduces crisis duration and also the probability of their occurrence; (ii) larger reserve requirements reduce crisis duration, but increase banking instability; (iii) deposit insurance increases banking system stability and reduces crisis duration. (vi) capital adequacy requirement improves stability and reduces the expected duration of banking crises.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 9299.

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Date of creation: 15 Jun 2008
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Handle: RePEc:pra:mprapa:9299

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Keywords: Banking Crises; Banking System Fragility Index; Banking Regulation; Markov Switching Regression;

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  1. Filardo, Andrew J. & Gordon, Stephen F., 1998. "Business cycle durations," Journal of Econometrics, Elsevier, Elsevier, vol. 85(1), pages 99-123, July.
  2. Kibritcioglu, Aykut, 2002. "Excessive Risk-Taking, Banking Sector Fragility, and Banking Crises," Working Papers 02-0114, University of Illinois at Urbana-Champaign, College of Business.
  3. 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.
  4. Franklin Allen & Douglas Gale, 2003. "Financial Intermediaries and Markets," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 00-44, Wharton School Center for Financial Institutions, University of Pennsylvania.
  5. Demirguc-Kunt, Asli & Detragiache, Enrica & Gupta, Poonam, 2006. "Inside the crisis: An empirical analysis of banking systems in distress," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(5), pages 702-718, August.
  6. Alan D. Morrison & Lucy White, 2005. "Crises and Capital Requirements in Banking," American Economic Review, American Economic Association, vol. 95(5), pages 1548-1572, December.
  7. Scott E. Hein & Jonathan D. Stewart, 2002. "Reserve requirements: A modern perspective," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 41-52.
  8. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
  9. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
  10. René Garcia, 1995. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," CIRANO Working Papers 95s-07, CIRANO.
  11. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 12(3), pages 299-308, July.
  12. Asli Demirguc-Kunt & Enrica Detragiache, 2000. "Does Deposit Insurance Increase Banking System Stability? An Empirical Investigation," Econometric Society World Congress 2000 Contributed Papers 1751, Econometric Society.
  13. Barry Eichengreen & Andrew K. Rose & Charles Wyplosz, 1994. "Speculative Attacks on Pegged Exchange Rates: An Empirical Exploration with Special Reference to the European Monetary System," NBER Working Papers 4898, National Bureau of Economic Research, Inc.
  14. Demirguc-Kunt, Asli & Kane, Edward J. & Laeven, Luc, 2006. "Determinants of deposit-insurance adoption and design," Policy Research Working Paper Series 3849, The World Bank.
  15. Coe, Patrick J, 2002. "Financial Crisis and the Great Depression: A Regime Switching Approach," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 34(1), pages 76-93, February.
  16. Morrison, Alan & White, Lucy, 2004. "Crises and Capital Requirements in Banking," CEPR Discussion Papers 4364, C.E.P.R. Discussion Papers.
  17. Eichengreen, Barry & Rose, Andrew K & Wyplosz, Charles, 1996. "Contagious Currency Crises," CEPR Discussion Papers 1453, C.E.P.R. Discussion Papers.
  18. Blum, Jurg, 1999. "Do capital adequacy requirements reduce risks in banking?," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 755-771, May.
  19. repec:ebl:ecbull:v:28:y:2002:i:6:p:a0 is not listed on IDEAS
  20. Marc Klau & John Hawkins, 2000. "Measuring potential vulnerabilities in emerging market economies," BIS Working Papers 91, Bank for International Settlements.
  21. Kim, Daesik & Santomero, Anthony M, 1988. " Risk in Banking and Capital Regulation," Journal of Finance, American Finance Association, American Finance Association, vol. 43(5), pages 1219-33, December.
  22. Tai-kuang Ho, 2004. "How Useful are Regime-Switching Models in Banking Crises Identification?," Econometric Society 2004 Far Eastern Meetings, Econometric Society 764, Econometric Society.
  23. Maddala, G.S., 1986. "Disequilibrium, self-selection, and switching models," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 3, chapter 28, pages 1633-1688 Elsevier.
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Cited by:
  1. 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.
  2. Isabel Argimón & Jenifer Ruiz, 2010. "The effects of national discretions on banks," Banco de Espa�a Working Papers 1029, Banco de Espa�a.

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