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Basel Core Principles and bank soundness: Does compliance matter?

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  • Demirgüç-Kunt, Asli
  • Detragiache, Enrica

Abstract

This paper studies whether compliance with the Basel Core Principles for effective banking supervision (BCPs) is associated with bank soundness. Using data for over 3000 banks in 86 countries, we find that neither the overall index of BCP compliance nor its individual components are robustly associated with bank risk measured by individual bank Z-scores. We also fail to find a relationship between BCP compliance and systemic risk measured by a system-wide Z-score.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:finsta:v:7:y:2011:i:4:p:179-190
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    References listed on IDEAS

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    1. Acharya, Viral V., 2009. "A theory of systemic risk and design of prudential bank regulation," Journal of Financial Stability, Elsevier, pages 224-255.
    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, pages 511-542.
    3. Udaibir S Das & Plamen Yossifov & Richard Podpiera & Dmitriy L Rozhkov, 2005. "Quality of Financial Policies and Financial System Stress," IMF Working Papers 05/173, International Monetary Fund.
    4. Barth,James R. & Caprio,Gerard & Levine,Ross, 2008. "Rethinking Bank Regulation," Cambridge Books, Cambridge University Press, number 9780521709309, December.
    5. Laeven, Luc & Levine, Ross, 2009. "Bank governance, regulation and risk taking," Journal of Financial Economics, Elsevier, vol. 93(2), pages 259-275, August.
    6. 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.
    7. Richard Podpiera, 2004. "Does Compliance with Basel Core Principles Bring Any Measurable Benefits?," IMF Working Papers 04/204, International Monetary Fund.
    8. Charles Goodhart, 2008. "The Regulatory Response to the Financial Crisis," FMG Special Papers sp177, Financial Markets Group.
    9. 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.
    10. 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.
    11. Kashyap, Anil K. & Rajan, Raghuram G. & Stein, Jeremy C., 2008. "Rethinking capital regulation," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 431-471.
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