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Financial regulation and performance : cross-country evidence

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  • Barth, James R.
  • Caprio Jr., Gerard
  • Levine, Ross

Abstract

Costly bank failures in the past two decades have focused attention on the need to find ways to improve the performance of different countries'financial systems. Belief is overwhelming that financial systems can be improved but there is little empirical evidence to support any specific advice about regulatory and supervisory reform. With scant cross-country comparisons of financial regulatory and supervisory systems, economists cannot decide how to correct incentives and moral hazard problems in developing economies--whether, for example, to require higher (and more narrowly defined) capital-to-asset ratios, to mandate stricter definition and disclosure of non-performing loans, to require that subordinated debt be issued, or to install world-class supervision. Proposed reforms usually involve changes in financial regulations and supervisory standards, but many pressing questions about reform remain unanswered. Making use of a new database, the authors come up with brief answers to three key questions: Do countries with relatively weak governments and bureaucratic systems impose harsher regulatory restrictions on bank activities? Yes. Do countries with more restrictive regulatory regimes have poorly functioning banking systems. No--or at least the evidence is mixed. Do countries with more restrictive regulatory systems have less probability of suffering a banking crisis? No. In fact, the reverse is true. In countries where banks'securities activities are restricted, the likelihood of a banking crisis is greater, other things being equal.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2037.

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Date of creation: 31 Jan 1999
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Handle: RePEc:wbk:wbrwps:2037

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Keywords: Financial Crisis Management&Restructuring; Payment Systems&Infrastructure; Banks&Banking Reform; Financial Intermediation; Environmental Economics&Policies; Banks&Banking Reform; Financial Intermediation; Financial Crisis Management&Restructuring; Environmental Economics&Policies; Economic Theory&Research;

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Cited by:
  1. Fotios Pasiouras & Chrysovalantis Gaganis & Constantin Zopounidis, 2008. "Regulations, Supervision Approaches and Acquisition Likelihood in the Asian Banking Industry," Asia-Pacific Financial Markets, Springer, vol. 15(2), pages 135-154, June.
  2. Nicola Cetorelli & Michele Gambera, 1999. "Banking market structure, financial dependence and growth: international evidence from industry data," Working Paper Series WP-99-8, Federal Reserve Bank of Chicago.
  3. M S Mohanty & Gert Schnabel & Pablo Garcia-Luna, 2006. "Banks and aggregate credit: what is new?," BIS Papers chapters, in: Bank for International Settlements (ed.), The banking system in emerging economies: how much progress has been made?, volume 28, pages 11-39 Bank for International Settlements.
  4. Armin J. Kammel, 2005. "A Proposal for the Governance of Financial Regulation and Supervision in Europe," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 74(4), pages 167-181.
  5. Lee, Bong-Soo, 2012. "Bank-based and market-based financial systems: Time-series evidence," Pacific-Basin Finance Journal, Elsevier, vol. 20(2), pages 173-197.
  6. Fotios Pasiouras & Chrysovalantis Gaganis & Michael Doumpos, 2007. "A multicriteria discrimination approach for the credit rating of Asian banks," Annals of Finance, Springer, vol. 3(3), pages 351-367, July.
  7. Micco, Alejandro & Panizza, Ugo & Yanez, Monica, 2007. "Bank ownership and performance. Does politics matter?," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 219-241, January.
  8. Cumming, Douglas & Dai, Na & Haß, Lars Helge & Schweizer, Denis, 2012. "Regulatory induced performance persistence: Evidence from hedge funds," Journal of Corporate Finance, Elsevier, vol. 18(5), pages 1005-1022.
  9. Fotios Pasiouras & Chrysovalantis Gaganis & Constantin Zopounidis, 2006. "The impact of bank regulations, supervision, market structure, and bank characteristics on individual bank ratings: A cross-country analysis," Review of Quantitative Finance and Accounting, Springer, vol. 27(4), pages 403-438, December.
  10. Mari PANGESTU, 2003. "The Indonesian Bank Crisis And Restructuring: Lessons And Implications For Other Developing Countries," G-24 Discussion Papers 23, United Nations Conference on Trade and Development.
  11. Christophe Godlewski, 2004. "Excess Credit Risk and Bank’s Default Risk An Application of Default Prediction’s Models to Banks from Emerging Market Economies," Finance 0409028, EconWPA.

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