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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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  2. 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.
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  21. Yu, Fan, 2005. "Accounting transparency and the term structure of credit spreads," Journal of Financial Economics, Elsevier, vol. 75(1), pages 53-84, January.
  22. Asli Demirgüç-Kunt & Enrica Detragiache, 2005. "Cross-Country Empirical Studies of Systemic Bank Distress: A Survey," National Institute Economic Review, National Institute of Economic and Social Research, vol. 192(1), pages 68-83, April.
  23. 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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  26. repec:ner:tilbur:urn:nbn:nl:ui:12-3125510 is not listed on IDEAS
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