Bank Regulation Is Changing: But for Better or Worse?

Authors: James R. BarthGerard Caprio, Jr.

Ross Levine

Presented by Levan Bzhalava

Do changes in bank regulation contributing positively to financial sector development?

Introduction

• Subsequent changes have taken place in the regulatory environment since the late 1990s.

• Some countries have reformed their regulations to empower private monitoring, others did opposite.

• 3 Surveys• 1st: 1998-99-2000

– 117 countries– 180 questions

• 2nd: 2003– 152 countries– 275 questions

• 3rd: 2006– 142 countries– 300+ questions

Data

Survey questions• Entry into banking• Ownership• Capital• Activities• External auditing requirements• Internal management/organizational requirements• Liquidity and diversification requirements• Depositor (savings) protection schemes• Provisioning requirements• Accounting/information disclosure requirements• Discipline/problem institutions/exit, and• Supervision.The majority of questions are structured to be in a yes/no format.Simple and precise questions increase the response rate

Bank regulation around the world

• Response to crises:Mexico - easing restrictions on banks.Argentina - tightened restrictions and policies ,

withdraw foreign banks • Most other crisis countries also moved in the

direction of greater restrictions.• U.S.A - dismantling barriers, separating

commercial banking, investment banking, and insurance.

Supervision around the World

• Official supervisory power lowers bank development.

In countries with a weak institutional environment, it was associated with increased corruption in the lending process

• Private monitoring boosts bank development

Regression

• Logit; • Cross-country OLS; • Cross-Bank OLS

EquationsY = α + βXY - either bank development, the net interest margin, or

overhead costsX - matrix of explanatory variables from Survey

Logit (P) = α + βX P - probability that the country suffers a systemic crisis

(or the probability that a firm responds that corrupt bank officials are an impediment to its growth).

X - matrix of explanatory variables from Survey

Conclusion

• Official supervisory power reduce bank development, increase corruption

• Look to why supervisory has not been working

• Restrictions on bank activities are bad• Focus on markets needs, improve

infrastructure, incentives to use it

• Diversification of bank activities is important

“Policies may work differently in different political and institutional regimes”

Gerard Caprio, Williams College

Supplementary sources • James R. Barth, Gerard Caprio, Jr. and Ross Levine (2002) “Bank Regulation and Supervision:

What Works Best,” www.bis.org/bcbs/events/b2ealev.pdf • Thorsten Beck, Aslı Demirgüç-Kunt, and Ross Levine (2005) “Bank Supervision and Corruption

in Lending,” Journal of Monetary Economics 53, 2131-2163 www.econ.brown.edu/fac/Ross_Levine/Publication/Forthcoming/Forth_3RL_Supervision%20Corruption%20Lending.pdf

• Gerard Caprio, Williams College “Bank Regulation Is Changing: But for Better or Worse?” www.hnb.hr/dub-konf/13-konferencija/caprio-college prezentacija.ppt?tsfsg=1817391646f8e9538cc7fbeaa2c53f48

• Photos sources: http://www.123rf.com/ ; Stock Photography and Stock Footage www.fotosearch.com/comstock/small-business/CSK198/ - 116k