Financial Regulation And Performance: Cross-Country Evidence

This paper examines three questions. First, do countries with relatively weak government/ bureaucratic systems impose harsher regulatory restrictions on activities of banks? Second, do countries with more restrictive regulatory systems have poorly functioning banking systems? Third, do countries with more restrictive regulatory systems have a lower probability of suffering a banking crisis? We find that the answers are as follows. Countries with weak government/ bureaucratic systems tend to impose harsher regulatory restrictions on the activities of banks. There is mixed evidence regarding the impact of regulatory restrictions on bank performance. Finally, we find that countries that restrict securities market activities tend to have more fragile banking systems.