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Banking on the principles : compliance with Basel Core Principles and bank soundness

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  • Demirguc-Kunt, Asli
  • Detragiache, Enrica
  • Tressel, Thierry

Abstract

This paper studies whether compliance with the Basel Core Principles for Effective Banking Supervision (BCP) improves bank soundness. BCP compliance assessments provide a unique source of information about the quality of bank supervision and regulation around the world. 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 provision. Specifically, countries that require banks to report regularly and accurately 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, as well as reverse causality. Measuring soundness through z-scores yields similar results. The 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 The World Bank in its series Policy Research Working Paper Series with number 3954.

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Date of creation: 01 Jun 2006
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Handle: RePEc:wbk:wbrwps:3954

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Keywords: Banks&Banking Reform; Financial Intermediation; Corporate Law; Financial Crisis Management&Restructuring; Insurance&Risk Mitigation;

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References

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  1. Andrew Feltenstein & Roger Dean Lagunoff, 2003. "International Versus Domestic Auditing of Bank Solvency," IMF Working Papers 03/190, International Monetary Fund.
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  8. Sironi, Andrea, 2003. " Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 443-72, June.
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  14. 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.
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  16. Alejandro Micco & Ugo Panizza & Mónica Yañez, 2004. "Bank Ownership and Performance," Research Department Publications 4381, Inter-American Development Bank, Research Department.
  17. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, vol. 71(4), pages 1027-1048, 07.
  18. Richard Podpiera, 2004. "Does Compliance with Basel Core Principles Bring Any Measurable Benefits?," IMF Working Papers 04/204, International Monetary Fund.
  19. Anthony J. Richards & David Deddouche, 1999. "Bank Rating Changes and Bank Stock Returns," IMF Working Papers 99/151, International Monetary Fund.
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