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Bankingon the Principles; Compliance with Basel Core Principles and Bank Soundness

  • Enrica Detragiache
  • Thierry Tressel
  • Asli Demirgüç-Kunt

This paper studies whether compliance with the Basel Core Principles for Effective Banking Supervision (BCPs) improves bank soundness. 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 provision2. Specifically, countries that require banks to regularly and accurately report 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, and reverse causality. Measuring soundness through Z-scores yields similar results. These 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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/242.

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Length: 33
Date of creation: 01 Oct 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/242
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  1. Yongseok Shin & Rachel Glennerster, 2003. "Is Transparency Good for You, and Can the IMF Help?," IMF Working Papers 03/132, International Monetary Fund.
  2. Mitton, Todd, 2002. "A cross-firm analysis of the impact of corporate governance on the East Asian financial crisis," Journal of Financial Economics, Elsevier, vol. 64(2), pages 215-241, May.
  3. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  4. Enrico C. Perotti & Ernst-Ludwig von Thadden, 1999. "Dominant Investors and Strategic Transparency," Working Papers 1999.24, Fondazione Eni Enrico Mattei.
  5. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  6. Yu, Fan, 2005. "Accounting transparency and the term structure of credit spreads," Journal of Financial Economics, Elsevier, vol. 75(1), pages 53-84, January.
  7. Patel, Sandeep A. & Balic, Amra & Bwakira, Liliane, 2002. "Measuring transparency and disclosure at firm-level in emerging markets," Emerging Markets Review, Elsevier, vol. 3(4), pages 325-337, December.
  8. Richard Podpiera, 2004. "Does Compliance with Basel Core Principles Bring Any Measurable Benefits?," IMF Working Papers 04/204, International Monetary Fund.
  9. 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.
  10. Asli Demirgüç-Kunt & Enrica Detragiache, 2005. "Cross-Country Empirical Studies of Systemic Bank Distress: A Survey," IMF Working Papers 05/96, International Monetary Fund.
  11. Udaibir S. Das & Plamen Yossifov & Richard Podpiera & Dmitriy Rozhkov, 2005. "Quality of Financial Policies and Financial System Stress," IMF Working Papers 05/173, International Monetary Fund.
  12. Andrew Feltenstein & Roger Dean Lagunoff, 2003. "International Versus Domestic Auditing of Bank Solvency," IMF Working Papers 03/190, International Monetary Fund.
  13. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," Journal of Economic Growth, Springer, vol. 9(3), pages 271-303, 09.
  14. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank.
  15. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2002. "Law, Endowment, and Finance," NBER Working Papers 9089, National Bureau of Economic Research, Inc.
  16. Richard Podpiera, 2006. "Does Compliance with Basel Core Principles Bring Any Measurable Benefits?," IMF Staff Papers, Palgrave Macmillan, vol. 53(2), pages 5.
  17. R. Gaston Gelos & Shang-Jin Wei, 2005. "Transparency and International Portfolio Holdings," Journal of Finance, American Finance Association, vol. 60(6), pages 2987-3020, December.
  18. Gropp, Reint & Richards, Anthony J., 2001. "Rating agency actions and the pricing of debt and equity of European banks: What can we infer about private sector monitoring of bank soundness?," Working Paper Series 0076, European Central Bank.
  19. Alejandro Micco & Ugo Panizza & Mónica Yañez, 2004. "Bank Ownership and Performance," IDB Publications (Working Papers) 6685, Inter-American Development Bank.
  20. Barth, James R. & Caprio Jr, 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.
  21. Andrea Sironi, 2000. "Testing for market discipline in the European banking industry: evidence from subordinated debt issues," Finance and Economics Discussion Series 2000-40, Board of Governors of the Federal Reserve System (U.S.).
  22. 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.
  23. David Marston, 2001. "Financial System Standards and Financial Stability; The Case of Basel Core Principles," IMF Working Papers 01/62, International Monetary Fund.
  24. Marcelo J. Moreira, 2003. "A Conditional Likelihood Ratio Test for Structural Models," Econometrica, Econometric Society, vol. 71(4), pages 1027-1048, 07.
  25. Anthony J. Richards & David Deddouche, 1999. "Bank Rating Changes and Bank Stock Returns; Puzzling Evidence From the Emerging Markets," IMF Working Papers 99/151, International Monetary Fund.
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