Do bank regulation and supervision matter?: International evidence from the recent financial crisis

In: Journal of financial economic policy, Band 7, Heft 3, S. 275-288

Abstract

Purpose
– The purpose of this paper is to examine the impact of bank regulation and supervision on bank development, efficiency and fragility over the period of 1999-2011.


Design/methodology/approach
– The authors' approach is based on a multivariate difference-in-difference model which controls for potential endogeneity of the explanatory variables and unobservable country-specific effect. The paper investigates the changes of bank outcomes and a country's regulation and supervisory practices, in terms of capital regulation, supervisory power, private monitoring, entry into banking requirements, overall restrictions on bank activities and government ownership of banks in a sample of 53 countries with a total of 482 observations.


Findings
– Empirical results indicate that greater capital regulatory requirements reduce bank fragility, as measured by lower levels of non-performing loans but reduce bank efficiency, as measured by higher levels of net interest margin; supervisory practices that strengthen private sector monitoring of banks improve bank development, as measured by bank private credit as a share of gross domestic product; lower levels of non-performing loans are associated with greater enter-into-banking requirements and less restrictiveness on bank activities; and greater government ownership of banks is associated with both higher levels of net interest margin and higher levels of non-performing loans. Overall, the findings support Basel II's first and third pillars: capital requirements and private monitoring.


Originality/value
– This cross-country analysis provides evidence on which specific regulatory and supervisory practices work best in light of what was learned from the recent financial crisis.