banking systems around the globe: do regulation and ownership

This PDF is a selection from an out-of-print volume from the National Bureauof Economic Research

Volume Title: Prudential Supervision: What Works and What Doesn't

Volume Author/Editor: Frederic S. Mishkin, editor

Volume Publisher: University of Chicago Press

Volume ISBN: 0-226-53188-0

Volume URL: http://www.nber.org/books/mish01-1

Conference Date: January 13-15, 2000

Publication Date: January 2001

Chapter Title: Banking Systems around the Globe: Do Regulation and OwnershipAffect Performance and Stability?

Chapter Author: James R. Barth, Gerard Caprio Jr., Ross Levine

Chapter URL: http://www.nber.org/chapters/c10757

Chapter pages in book: (p. 31 - 96)

James R. Barth is the Lowder Eminent Scholar in Finance at Auburn University and aSenior Finance Fellow at the Milken Institute. Gerard Caprio Jr. holds the joint positions ofDirector, Financial Policy and Strategy, and Manager, Financial Sector Research, at theWorld Bank. Ross Levine is Professor of Finance at the Carlson School of Management,University of Minnesota.

The authors benefited from comments by Joseph Stiglitz, Mark Gertler, Rick Mishkin,and conference participants. The authors gratefully acknowledge the excellent research assis-tance provided by Teju Herath, Cindy Lee, and Iffath Sharif. The findings, interpretations,and conclusions expressed in this paper are entirely those of the authors and do not necessar-ily represent the views of the World Bank, its executive directors, or the countries they rep-resent.

1. For cross-country evidence supporting this relationship, see King and Levine (1993a,b);Levine and Zervos (1998); Beck, Levine, and Loayza (2000); and Levine, Loayza, and Beck(2000). In a similar vein, Rajan and Zingales (1998) provide cross-country, industry-levelevidence. Using firm-level data, Demirguc-Kunt and Maksimovic (1998) show that financialdevelopment increases economic growth whereas Wurgler (2000) shows the benefits of fi-nancial development for the allocation of investments across industries based upon theirgrowth opportunities. In a related context, Jayaratne and Strahan (1996) show that liberaliz-ing restrictions on interstate branching in the United States has led to more rapid stategrowth. More generally, Gertler (1988) and Levine (1997) provide literature reviews on theimportance of financial systems.

�2Banking Systems around the GlobeDo Regulation and OwnershipAffect Performance and Stability?

James R. Barth, Gerard Caprio Jr., and Ross Levine

2.1 Introduction

Financial systems in countries throughout the world range from fairlyrudimentary to quite sophisticated and from extremely fragile to relativelystable. A growing number of studies provide empirical evidence that well-functioning financial systems accelerate long-run economic growth byallocating funds to more productive investments than poorly developed fi-nancial systems.1 This convincing evidence has intensified calls for finan-cial sector reforms that improve financial system performance and therebypromote economic development.

31

2. The most notable exception is the Basel Committee on Banking Supervision’s proposednew capital adequacy framework, which provides for more risk classes and raises the possibil-ity of using credit ratings to set risk weights. For more information, see Caprio and Hono-han (1999).

Stable banking systems are an important component of well-functioningfinancial systems, as has been vividly demonstrated by recent develop-ments around the globe. When banking or, more generally, financial sys-tems temporarily break down or operate ineffectively, the ability of firmsto obtain funds necessary for continuing existing projects and pursuingnew endeavors is curtailed. Severe disruptions in the intermediation pro-cess can even lead to financial crises and, in some cases, undo years ofeconomic and social progress. Since 1980 more than 130 countries haveexperienced banking problems that have been costly to resolve and disrup-tive to economic development. This troublesome situation has led to callsfor banking reform by national governments and such international organ-izations as the World Bank and the International Monetary Fund. Apartfrom some fairly general proposals for reform, such as greater transpar-ency and an international financial authority, there are relatively few pro-posals for specific structural, regulatory, and supervisory reforms.2 This isunderstandable because there is relatively little empirical evidence to sup-port any specific proposal.

To determine specific banking reforms that will limit bank fragility andpromote well-functioning financial systems requires two steps. First, onemust obtain cross-country data on bank ownership, regulation, and super-vision. This enables one to establish the extent to which banks operate indifferent ownership, regulatory, and supervisory environments. Only byknowing the regulatory environment can one really know what a bank isor what a bank does in different countries. Surprisingly, such informationis not widely available from official sources for a wide range of countries.In practical terms, however, it is the regulatory environment that actuallydefines what is meant by the term bank. Second, one must use such datato assess the relationships between different environments and bank per-formance or, more generally, financial performance. Only by doing thiscan one really know whether banks matter. In other words, such an effortenables one to identify better those bank ownership, regulatory, and super-visory practices that will foster financial stability and enhance long-runeconomic growth.

The purposes of this paper are (a) to collect and report cross-countrydata on bank regulation and ownership and (b) to evaluate the links be-tween different regulatory/ownership practices and both financial sectorperformance and banking system stability. In so doing our paper helps fillthe gap between the questions posed by policymakers about how to reformbanking systems and the currently available evidence on the issue pro-

32 James R. Barth, Gerard Caprio Jr., and Ross Levine

3. For reviews of the literature regarding this issue, see Kwan and Laderman (1999) andSantos (1998a,b,c). Also, see Barth, Brumbaugh, and Yago (1997); Kane (1996); Krosznerand Rajan (1994); and White (1986) for discussions of some of these issues. On 12 November1999 laws in the United States restricting banks from engaging in securities and insuranceactivities were repealed (see Barth, Brumbaugh, and Wilcox 2000).

4. Camdessus (1997) describes this as: “the development of new types of financial instru-ments, and the organization of banks into financial conglomerates, whose scope is often hardto grasp and whose operations may be impossible for outside observers—even [sic!] bankingsupervisors—to monitor” (537).

duced by researchers. The paper in several respects substantially extendsthe preliminary investigation reported in Barth, Caprio, and Levine (1999).We do this by enlarging our earlier sample of forty-five countries to morethan sixty countries, updating existing data, materially improving the qual-ity of the data, adding new information on the banking environment indifferent countries, and testing additional hypotheses. We provide doc-umentation showing the substantial cross-country variation in regula-tory restrictions on various activities of banks, in legal restrictions on themixing of banking and commerce, and in the structure of bank owner-ship. Although we examine the socioeconomic determinants of regulatorychoices by governments, the focus is on examining which types of reg-ulatory practices and ownership structures are associated with well-functioning, stable banking systems.

Motivated by a long and divisive policy debate (especially in the UnitedStates)3 over the extent to which the activities of banks should be limited,this paper examines the following questions:

1. Do countries with regulations that impose tighter restrictions on theability of commercial banks to engage in securities, insurance, and realestate activities have (a) less efficient but (b) more stable financial systems?

2. Do countries that restrict the mixing of banking and commerce—both in terms of banks owning nonfinancial firms and nonfinancial firmsowning banks—have (a) less efficient but (b) more stable banking systems?

3. Do countries in which state-owned banks play a large role have morepoorly functioning financial systems?

Those who favor restricting commercial banks to traditional deposittaking and loan making argue that inherent conflicts of interest arise whenbanks engage in such activities as securities underwriting, insurance un-derwriting, real estate investment, and owning nonfinancial firms. Ex-panding the array of permissible activities, moreover, may provide greateropportunities for moral hazard to distort the investment decisions ofbanks, especially when they operate within a deposit insurance system(Boyd, Chang, and Smith 1998). Furthermore, in an unrestricted environ-ment, the outcome may be a few large, functionally diverse, and dominantbanks that could (a) complicate monitoring by bank supervisors and mar-ket participants4 and (b) lead to a more concentrated and less competitive

Banking Systems around the Globe 33

5. Mishkin (1999, 686), furthermore, states that the “benefits of increased diversificationopen up opportunities for reform of the banking system because it makes broad-based de-posit insurance less necessary and weakens the political forces supporting it.”

6. This may reflect the fact that in such a situation banks are limited to the extent thatthey can cover costs with fee income.

nonfinancial sector. Relatively few regulatory restrictions on commercialbanking activities and relatively few legal impediments to the mixing ofbanking and commerce may therefore produce less efficient and more frag-ile financial systems.

Those who favor substantial freedom with respect to the activities ofcommercial banks argue that universal banking creates more diversifiedand thereby more stable banks. Fewer regulatory restrictions may also in-crease the franchise value of banks and thereby augment incentives forbankers to behave more prudently, with positive implications for bank sta-bility. Furthermore, the opportunity to engage in a wide range of activitiesenables banks to adapt and hence provide more efficiently the changingfinancial services being demanded by the nonfinancial sector. Thus, fewerregulatory restrictions on the activities of commercial banks and the mix-ing of banking and commerce may produce more efficient and more stablefinancial systems.5 The lack of appropriate cross-country data, however,has impeded the ability to examine the relationship between commercialbank regulations and both the functioning and the stability of the finan-cial system.

This paper attempts to rectify this situation and in so doing providesthe following answers to the questions posed above. First, we do not finda reliable statistical relationship between regulatory restrictions on theability of commercial banks to engage in securities, insurance, and realestate activities and (a) the level of banking sector development, (b) securi-ties market and nonbank financial intermediary development, or (c) thedegree of industrial competition. Indeed, based on the cross-country evi-dence, it would be quite difficult for someone to argue confidently thatrestricting commercial banking activities impedes—or facilitates—finan-cial development, securities market development, or industrial competi-tion. We do, however, find that regulatory restrictions on the ability ofbanks to engage in securities activities tend to be associated with higherinterest rate margins for banks.6 Thus, even though there may be somenegative implications for bank efficiency due to restricting commercialbank activities, the main message is that there is little relationship betweenregulatory restrictions on banking powers and overall financial develop-ment and industrial competition.

Second, in terms of stability, we find a strong and robust link to theregulatory environment. Countries with greater regulatory restrictions onthe securities activities of commercial banks have a substantially higherprobability of suffering a major banking crisis. More specifically, countrieswith a regulatory environment that inhibits the ability of banks to engage


7. For a view on ownership links that is relatively unfashionable today, see Lamoreaux(1994).

in the businesses of securities underwriting, brokering, dealing, and allaspects of the mutual fund business tend to have more fragile financialsystems. The positive link between regulatory restrictions and major oreven systemic banking crises, moreover, does not appear to be due to re-verse causation.

Third, we find no beneficial effects from restricting the mixing of bank-ing and commerce. We specifically examine (a) the ability of banks to ownand control nonfinancial firms and (b) the ability of nonfinancial firms toown and control commercial banks. There is not a reliable relationshipbetween either of these measures of mixing banking and commerce andthe level of banking sector development, securities market and nonbankfinancial intermediary development, or the degree of industrial compe-tition.

Fourth, restricting the mixing of banking and commerce is associatedwith greater financial fragility. Whereas restricting nonfinancial firms fromowning commercial banks is unassociated with financial fragility, re-stricting banks from owning nonfinancial firms is positively associatedwith bank instability. We find that those countries that restrict banks fromowning nonfinancial firms have a robustly higher probability of sufferinga major banking crisis. Thus, one of the major reasons for restricting themixing of banking and commerce—to reduce financial fragility—is notsupported by the cross-country evidence presented in this paper. Thisfinding is particularly notable in the wake of the East Asian crisis and thehaste with which many have concluded that all things Asian—includingclose ownership links—lead to crises. Besides the fact that for decadessuch links did not produce crises, our research shows that concerns aboutneither financial sector development nor financial fragility should promptcalls for a more restrictive environment.7

Fifth, greater state ownership of banks tends to be associated with morepoorly developed banks, nonbanks, and securities markets. In an inde-pendent study using alternative measures of bank ownership, La Porta,Lopez-de-Silanes, and Shleifer (2000) also examine the relationship be-tween government ownership and financial development. They convinc-ingly show that government ownership retards financial development.Thus, even though the proponents of state ownership of banks argue thatit helps overcome informational problems and better directs scarce capitalto highly productive projects, the data assembled here and by La Porta,Lopez-de-Silanes, and Shleifer (2000) tell a different story. On average,greater state ownership of banks tends to be associated with more poorlyoperating financial systems.

Besides documenting the substantial cross-country variation in commer-cial banking regulations and ownership, our analyses of the data highlight


some negative implications of imposing regulatory restrictions on the ac-tivities of commercial banks. Specifically, regulations that restrict the abil-ity of banks to (a) engage in securities activities and (b) own nonfinancialfirms are closely associated with greater banking sector instability. Theanalyses, moreover, suggest no countervailing beneficial effects from re-stricting the mixing of banking and commerce or from restricting the ac-tivities of banks in the areas of securities, insurance, and real estate.

The research upon which this paper is based is still ongoing, so ourpaper should be viewed as a progress report. We are collecting consider-ably more information about bank structure, regulation, and especiallysupervision, and the sample of countries is being enlarged. The new cross-country data that we are collecting on the supervisory environment willpermit us—and others—to investigate more fully the interrelated issuesof regulatory and supervisory practices or policies. To date, our effortsnonetheless represent substantial progress on understanding what a bankdoes in different countries and whether it matters. By publishing the ex-isting data and reporting the empirical results, we hope both to contributeto the ongoing debate over appropriate banking reforms and to facilitatefurther research on this important topic.

2.2 Bank Regulations and Ownership versus FinancialDevelopment and Industrial Competition

This section examines the relationship between commercial bankingregulations and state ownership of banks on the one hand and the level offinancial sector development and the degree of industrial sector competi-tion on the other. The objective is to assess whether governments thatrestrict the activities of banks, inhibit the mixing of banking and com-merce, and own a substantial fraction of the banking sector tend to have(a) more or less efficient and developed banks, (b) better or worse func-tioning securities markets and nonbank financial intermediaries, and(c) greater or lesser competition in the nonfinancial sector. To examine allthese issues, we constructed an extensive data set.

Section 2.2.1 introduces the regulatory and ownership variables. We de-fine the variables, briefly describe their construction, and present summarystatistics. Section 2.2.2 briefly describes the various measures of financialsector development and industrial competition that are employed. Section2.2.3 presents our regression results and a summary of our conclusions.

2.2.1 Regulatory Restrictions and Ownership

Data Collection and Definitions

We have constructed indexes on the degree to which government regula-tors permit commercial banks to engage in securities, insurance, and real


estate activities. We have also constructed indexes on the degree to whichregulators permit commercial banks to own nonfinancial firms and viceversa. Furthermore, we have obtained information on the degree of stateownership of commercial banks. We have assembled this data and checkedits accuracy through a number of different channels. Specifically, we haveobtained the data used in this paper primarily from international surveysconducted independently by the Office of the Comptroller of the Currency(OCC) and the World Bank. We have confirmed the responses for as manycountries as possible using information from Barth, Nolle, and Rice(2000); the Institute of International Bankers (Global Survey, variousyears); Euromoney (Banking Yearbook, various years); and various centralbank and bank regulatory agency publications. When inconsistencies havearisen, we have—through the OCC and the World Bank—attempted tocommunicate with the relevant national regulatory authorities to resolvethem. Although some problems undoubtedly remain, we nonetheless be-lieve we have assembled the most accurate and comprehensive data oncommercial bank regulatory policies to date.

Bank Activities. We use measures of the degree to which national regula-tory authorities allow commercial banks to engage in the following three“nontraditional” activities: Securities, the ability of commercial banks toengage in the business of securities underwriting, brokering, dealing, andall aspects of the mutual fund industry; Insurance, the ability of banks toengage in insurance underwriting and selling; Real Estate, the ability ofbanks to engage in real estate investment, development, and management.

We have assessed each country’s regulations concerning these activitiesand rated the degree of regulatory restrictiveness for each activity from 1to 4, with larger numbers representing greater restrictiveness. The defini-tions of the designations are as follows:

1. Unrestricted: A full range of activities in the given category can beconducted directly in the commercial bank.

2. Permitted: A full range of activities can be conducted, but all or somemust be conducted in subsidiaries.

3. Restricted: Less than a full range of activities can be conducted inthe bank or subsidiaries.

4. Prohibited: The activity cannot be conducted in either the bank orsubsidiaries.

Mixing Banking and Commerce. We have constructed two measures of thedegree of regulatory restrictions on the mixing of banking and commerce.Again, we have rated the regulatory restrictiveness for each variable from1 to 4. The variable definitions and the definitions of the designations areas follows:


Nonfinancial Firms Owning Banks: the ability of nonfinancial firms toown and control banks.

1. Unrestricted: A nonfinancial firm may own 100 percent of the equityin a bank.

2. Permitted: Ownership is unrestricted with prior authorization or ap-proval.

3. Restricted: Limits are placed on ownership, such as a maximum per-centage of a bank’s capital or shares.

4. Prohibited: There is no equity investment in a bank.

Banks Owning Nonfinancial Firms: the ability of banks to own and con-trol nonfinancial firms.

1. Unrestricted: A bank may own 100 percent of the equity in any non-financial firm.

2. Permitted: A bank may own 100 percent of the equity in a nonfinan-cial firm, but ownership is limited based on a bank’s equity capital.

3. Restricted: A bank can only acquire less than 100 percent of theequity in a nonfinancial firm.

4. Prohibited: A bank may not acquire any equity investment in a non-financial firm.

State Ownership. We also have data on the degree of state ownership ofbanks:

Stateowned Bank Assets: State-owned bank assets as a share of totalcommercial bank assets.

In terms of timing, the data represent the regulatory environment in1997. In an earlier study, we collected information on these regulations fora smaller sample of countries in 1995. Even though there were very fewregulatory changes, some of our assessments changed as more informationbecame available. We discuss the issue of regulatory change as it relates toour findings in greater detail later when we examine the linkages betweenthe regulations and banking crises.

Summary Statistics

Table 2.1 lists the numerical values for each of the six indicators for theregulatory environment. We also compute a summary index of the firstfour indicators of the regulatory restrictions imposed on banks. Specifi-cally, Restrict equals the average of Securities, Insurance, Real Estate, andBanks Owning Nonfinancial Firms. Table 2.2 presents summary statisticsindicating the extensive cross-country variation in the data. For example,there were nine countries with very restrictive regulatory systems (Restrict� 3): Japan, Mexico, Rwanda, Ecuador, Barbados, Botswana, Indonesia,Zimbabwe, and Guatemala. The value for the United States is 3. There


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6263

were nine countries that permitted wide latitude in terms of commercialbanking activities (Restrict � 1.75): Switzerland, Suriname, South Africa,the Netherlands, Luxembourg, United Kingdom, New Zealand, Austria,and Israel. Furthermore, there is substantial representation in terms ofboth geographical location and income level of the sample countries. Be-sides the twenty-four Organization for Economic Cooperation and Devel-opment (OECD) countries, there are fourteen Latin American countries,eleven countries from Sub-Saharan Africa, and twelve from Asia, as wellas five countries from northern Africa and non-OECD Europe.

At the outset, we expected to observe that governments that restrictedbanking activities in one area—for example, securities activities—wouldalso restrict banking activities in other areas, like real estate activities. Wetherefore expected extremely large, positive correlations among the Securi-ties, Real Estate, Insurance, Banks Owning Nonfinancial Firms, and Non-financial Firms Owning Banks variables. There is clearly a positive associ-ation among the different regulatory variables, but it is not extremely high.Table 2.3 shows the correlations among the six regulatory/ownership in-dicators. Although Securities and Real Estate are significantly correlatedwith three of the four other regulatory indicators at the 0.05 significancelevel, Insurance and Banks Owning Nonfinancial Firms are significantlycorrelated with only two of the four other indicators, and NonfinancialFirms Owning Banks is not significantly correlated with any of the others.Furthermore, the correlation coefficients on the statistically significant re-lationships are all below 0.50. Thus, there is cross-country diversity in theindividual regulatory restrictions. This suggests that it is important to ex-amine each of the regulatory variables individually, instead of using only asingle index such as Restrict to capture the regulatory environment. Thus,even though we report the results on Restrict, we focus our discussionalmost entirely on the individual regulatory variables because they providemuch more information.

2.2.2 Financial Sector Performance andIndustrial Competition: Definitions

This section describes the paper’s indicators of bank development, secu-rities market development, and industrial competition. For each category,we considered a wide array of measures. We highlight the measure pre-sented in the tables (see table 2A.2 for the values of the measures for oursample countries) and also mention the other measures that were studied.

Bank Development

Net interest margin equals net income divided by total assets and is theaverage value over the 1990–95 period (Beck, Demirguc-Kunt, and Levine2001). Recognizing that many factors influence interest rates besides thedegree of efficiency of bank operations, we include this in our measures of


Tabl

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bank development because of its wide use in the literature and its empiri-cal availability.

Private credit equals claims on the private sector by deposit moneybanks and other financial institutions as a share of GDP and is the averagevalue over the 1980–95 period (Levine, Loayza, and Beck 2000). This is ageneral and widely used measure of financial sector development. We alsoused other measures such as (a) claims by deposit money banks on theprivate sector, (b) liquid liabilities, and (c) total assets of the commercialbanking sector relative to GDP in 1997. These alternative measures do notalter any of the conclusions, however.

Bank concentration equals the share of total assets of the three largestbanks and is the average value over the 1990–95 period (Beck, Demirguc-Kunt, and Levine 2001). This variable captures the degree of concentrationin the banking industry. We also used such measures as the number ofbanks per capita and the share of total assets of the single largest bank.These alternative measures produced similar results, however.

Securities Development

Total value traded equals the value of domestic equities traded on do-mestic exchanges divided by GDP, averaged over the 1980–95 period(Beck, Demirguc-Kunt, and Levine 2001). Levine and Zervos (1998) showthat stock market liquidity is important for economic growth. They furthernote that it is liquidity per se, not equity market capitalization, that iscrucial. We also used measures of primary market activity and bond mar-ket activity. Specifically, we collected information on the (a) total amountof outstanding domestic debt securities issued by private or public domes-tic entities as a share of GDP, (b) total equity issues as a share of GDP,and (c) private, long-term debt issues as a share of GDP. Although thesealternative measures yield similar results, they are available for far fewercountries.

Nonbank credits equals nonbank financial institution claims on the pri-vate nonfinancial sector as a share of GDP and is the average value overthe 1980–95 period (Beck, Demirguc-Kunt, and Levine 2001). To assessthe robustness of our findings, we also used direct measures of the size ofparticular nonbank financial institutions, including insurance companies,mutual funds, and private pension funds. Again, these alternative mea-sures produced similar findings, but they are available for far fewer coun-tries.

Industrial Competition

Industrial competition is based upon a survey question in which respon-dents indicate the degree to which they agree with the following statement:“Market domination is not common in your country” (Dutz and Hayri1999). To examine whether commercial bank regulatory restrictiveness is


associated with industrial competition, we also examined such measuresas (a) the degree of business freedom and competition, (b) the percentageof economic activity controlled by the thirty largest companies, and (c) theperceived effectiveness of antitrust policy. These alternative measures pro-duced similar results, however.

2.2.3 Empirical Results

The objective here is to present a rudimentary, first-cut empirical evalu-ation of the relationship between bank regulatory restrictions, mixingbanking and commerce, and state ownership of banks, on the one hand,and bank development, securities development, and industrial competition,on the other. Future work will deal more rigorously with specific hypothe-ses about such relationships as well as with numerous methodologicalissues.

To this end, we first present the simple correlations between each of themeasures of the regulatory/ownership environment and the indicators ofbank development, securities development, and industrial competition.We then present regression results in which we control for economic devel-opment (i.e., the level of real per capita GDP) and an index of the qualityof government. More specifically, Development equals the logarithm ofreal per capita GDP in 1980 (source: Penn World Tables). Good Govern-ment equals the summation of three variables: (a) risk of expropriation bythe government, (b) degree of corruption, and (c) the law-and-order tradi-tion of the country, with greater values signifying less risk of expropriation,less official corruption, and a greater law-and-order tradition (source: LaPorta et al., 1999).

It is important to control for other features of the environment in evalu-ating the relationship between the commercial bank regulatory/ownershipregime with financial development and industrial competition. For in-stance, there may be countries in which corrupt governments that do notenforce the rule of law and tend to expropriate private property have se-lected policies that have led to both poor economic performance andunderdeveloped financial systems. If such governments also uniformly en-act certain types of commercial bank regulations, we would not want tointerpret a significant correlation between bank regulations and financialdevelopment as representing an independent link unless we control forthe quality of the government. We therefore use the simple measures justdescribed to control for some natural characteristics of the policy environ-ment in assessing whether there is an independent link between the com-mercial bank regulatory/ownership structure and the financial/industrialsystem more generally. These variables to some extent also serve as a proxyfor the overall quality of bank supervision. Heteroscedasticity-consistentstandard errors are reported for these regression results.

The empirical findings are startlingly underwhelming as summarized in


8. In this regard, Cetorelli and Gambera (2001, 23), in a study assessing the relevance ofthe market structure for the “finance-growth relationship,” state that “it would be interestingto investigate whether it matters if banks are privately or state-owned.”

tables 2.4–2.10. First, it would be very difficult for someone to argue con-fidently that restricting the activities of commercial banks adversely affectsfinancial development, securities market development, or industrial com-petition. At the same time, it would be very difficult for someone to argueconfidently that easing restrictions on commercial banking activities facili-tates greater financial development, securities market development, or in-dustrial competition. Specifically, although countries with more restrictiveregulations tend to have less well developed banking sectors and securitiesmarkets as well as lower levels of industrial competition, the correlationsare frequently not statistically significant; nor do they retain their valueswhen controlling for other factors in a regression context. Indeed, Securi-ties, Insurance, and Real Estate do not enter any of the regressions signifi-cantly when one includes Private Credit, Bank Concentration, IndustrialCompetition, Total Value Traded, or Nonbank Credits. As discussed ear-lier, these conclusions are robust to a wide assortment of measures ofbanking sector development, industrial competition, and securities mar-ket development.

Second, it would be very difficult to argue that restricting the mixing ofbanking and commerce—either by restricting bank ownership of nonfi-nancial firms or by restricting nonfinancial firm ownership of banks—impedes or facilitates overall financial development or industrial competi-tion. Banks Owning Nonfinancial Firms and Nonfinancial Firms OwningBanks do not enter any of the regressions significantly. These findings holdwhen using alternative measures of banking sector development, industrialcompetition, and securities market development.

Third, there is some evidence that restricting commercial banks fromsecurities and real estate activities tends to raise net interest margins. Thus,restricting commercial banks from securities and real estate activities mayhave some negative implications for bank efficiency. Taken as a whole,however, the analysis of the data indicates little link between the restric-tiveness of commercial bank regulations and the mixing of banking andcommerce, on the one hand, and financial development (taken broadly)and industrial competition, on the other.

Fourth, in terms of state ownership, the empirical evidence suggests anegative relationship between the degree of state ownership of banks andfinancial development.8 Countries with greater state ownership of bankstend to have less-developed banks and nonbanks. It should also be notedin this context that underdeveloped financial systems tend to exert a nega-tive influence on long-run growth (see Levine, Loayza, and Beck 2000 andLevine 2001). Although considerably more research needs to be done


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der

trad

itio

nof

the

coun

try,

and

the

leve

lof

corr

upti

on.

Non

finan

cial

Fir

ms

Ow

ning

Ban

ks�

the

abili

tyof

nonfi

nanc

ialfi

rms

toow

nba

nks.

Lar

ger

valu

esim

ply

grea

ter

rest

rict

ions

onba

nkac

tivi

ties

.1�

limit

spl

aced

onow

ners

hip;

0�

nolim

its

plac

edon

owne

rshi

p.N

umbe

rsin

pare

nthe

ses

are

p-va

lues

.

Tabl

e2.

10R

elat

ions

hip

Bet

wee

nS

tate

Ow

ners

hip

ofB

ank

Ass

ets

and

Alt

erna

tive

Mea

sure

sof

Fin

anci

alD

evel

opm

ent

Net

Inte

rest

Pri

vate

Ban

kIn

dust

rial

Tota

lVal

ueN

onba

nkM

argi

nC

redi

tC

once

ntra

tion

Com

peti

tion

Tra

ded

Cre

dits

A.C

orre

lati

ons

Stat

e-O

wne

dB

ank

Ass

ets

0.21

6�

0.34

50.

095

�0.

247

�0.

273

�0.

380

(0.1

17)

(0.0

09)

(0.4

96)

(0.1

15)

(0.0

52)

(0.0

17)

B.R

egre

ssio

nsSt

ate-

Ow

ned

Ban

kA

sset

s0.

011

�0.

275

0.00

7�

0.41

4�

0.12

9�

0.24

2(0

.522

)(0

.088

)(0

.962

)(0

.562

)(0

.065

)(0

.012

)

No.

ofco

untr

ies

5457

5442

5139

R2

0.24

0.48

0.05

0.28

0.18

0.49

Not

es:R

egre

ssio

nsin

clud

ea

cons

tant

,the

loga

rith

mof

real

per

capi

taG

DP,

and

the

vari

able

Goo

dG

over

nmen

t,w

hich

com

bine

sm

easu

res

ofex

prop

riat

ion

risk

,the

law

and

orde

rtr

adit

ion

ofth

eco

untr

y,an

dth

ele

velo

fco

rrup

tion

.Sta

teO

wne

rshi

pof

Ban

kA

sset

s�

perc

enta

geof

bank

asse

tsac

coun

ted

for

byst

ate-

owne

dba

nks.

Num

bers

inpa

rent

hese

sar

ep-

valu

es.

before a causal interpretation can be given to these findings, it may justifysome concern among policy makers in countries where state banks play amajor role in credit allocation. In this sample alone it appears that abouthalf the world’s people live in countries with banking systems that are amajority state-owned (Brazil, China, Egypt, India, Pakistan, and recentlyIndonesia), which underscores the importance of this concern.

In sum, the lack of a close and reliable link between the regulatory envi-ronment and overall financial development and industrial competition isrobust to various alterations in the conditioning information set and toredefinitions of the regulatory indicators. In the analysis, however, the reg-ulatory variables take values ranging from 1 through 4. This particularscaling may create an interpretation problem because the difference be-tween a 2 and a 3 may not be the same as the difference between a 3 anda 4, or a 1 and a 2. We therefore examine the sensitivity of the empiricalresults to this scale in three ways. First, we created a new regulatory indica-tor that assumed values of 1 through 3, rather than 1 through 4. This newvariable equals 1 if the original indicator equals 1; the new variable equals2 if the original indicator equals 2 or 3; and the new variable equals 3 ifthe original indicator equals 4. Second, we created an additional regulatoryindicator for each category (Securities, Insurance, Real Estate, BanksOwning Nonfinancial Firms, and Nonfinancial Firms Owning Banks)with values of either 1 or 0. The additional regulatory indicator takes thevalue 1 if the original indicator was 1 or 2, and 0 otherwise. Finally, wealso used separate dummy variables for each value between 1 and 4. Inthis case, we created four dummy variables: Securities1, Securities2, Secu-rities3, and Securities4. Securities1 equals 1 if Securities equals 1, and 0otherwise; Securities2 equals 1 if Securities equals 2, and 0 otherwise; andso on. We created these new variables for all the regulatory indicators.Using these alternative indicators, however, did not change this section’sconclusions. The results are robust to changes in the other regressors too.Also, it is important to note that these conclusions are robust to the inclu-sion of regional dummy variables. Thus, the results are not simply re-flecting regional differences in regulatory policies. Furthermore, we con-ducted the analysis using the individual components of Good Governmentinstead of the conglomerate index. This modification also did not alterthe results. Lastly, we confirmed our empirical results using indexes ofbureaucratic efficiency, government red tape, and the degree to which gov-ernments repudiate contracts.

2.3 Regulatory Restrictions, Ownership, and Banking Crises

This section evaluates the relationship between banking crises and(a) regulatory restrictions on the activities of commercial banks, (b) regu-latory restrictions on the mixing of banking and commerce, and (c) state


ownership of banks. Allowing banks to engage in a wide range of activitiesmay increase bank fragility by expanding the set of external risks affectingbanks and by allowing banks themselves to choose among a broader as-sortment of risky ventures. On the other hand, allowing banks more free-dom may lower bank fragility through greater diversification of the sourcesof profits for banks. This paper assesses which of these two opposingforces tends to dominate. In terms of state ownership of banks, we believethe links will be more opaque. State-owned banks that encounter difficul-ties may receive subsidies through various channels, so that the banks arenever identified as being in a crisis. Nonetheless, we conduct the analysiswith the information available. After describing our definition of whether acountry experienced a banking crisis or not, we present probit regressionsincorporating the regulatory/ownership variables and a wide array of fac-tors to control for other potential influences on bank fragility. We find thatregulatory restrictiveness is positively linked with financial fragility. Wethen present evidence suggesting that this result is not due to reverse cau-sation.

2.3.1 Definition of a Crisis

To investigate the relationship between the regulatory/ownership envi-ronment and financial fragility, we use two measures of whether a county’sbanking system suffered a crisis during the last fifteen years.

Systemic is based upon Caprio and Klingebiel’s (1999) determination ofwhether a country experienced a systemic banking crisis. The variabletakes the value 1 if there was a systemic crisis, and 0 otherwise. The au-thors define a systemic crisis as meaning that all or most of the bankingsystem’s capital was eroded during the period of the crisis. The assess-ments are made for countries from the late 1970s into early 1999.

Major equals Systemic except for two adjustments. First, the Caprioand Klingebiel (1999) indicator of systemic banking crises is expanded toinclude countries that experienced major, though perhaps not systemic,banking crises over the 1985–97 period. This results in the addition ofCanada (fifteen members of Canadian Deposit Insurance Companyfailed), Denmark (cumulative losses of 9 percent of loans), Hong Kong(nine out of eighteen banks failed over the period), India (nonperformingloans estimated as 16 percent of total loans), Italy (fifty-eight banks ac-counting for 11 percent of total loans were forcibly merged), and theUnited States (estimated savings and loans clean-up costs of 3.2 percentof GDP). Second, we exclude two countries (Israel and Spain) from theCaprio/Klingebiel list of systemic banking crises because their crises oc-curred in the late 1970s and therefore are outside our sample period. Wereport the results using Major but reach similar conclusions using Sys-temic. The values of Major and Systemic are listed in table 2A.3.


2.3.2 Empirical Results

The empirical results indicate that countries that restrict commercialbanks from engaging in securities activities and countries that restrictcommercial banks from owning nonfinancial firms have a higher probabil-ity of suffering a major banking crisis. Table 2.11 summarizes these find-ings. Besides simple correlations, we present probit regressions that con-trol for other characteristics of the national environment. Specifically, wecontrol for the level of economic development (Development) and the qual-ity of the government (Good Government) in the probit regressions. Asshown, countries with greater regulatory restrictions on commercial banksecurities activities and the ability of banks to own and control nonfinan-cial firms have a higher probability of experiencing major banking sectordistress.

The positive and significant relationship between financial fragility andregulatory restrictions on the securities activities of banks and restrictionson commercial bank ownership of nonfinancial firms is robust to a num-ber of alterations in the econometric specification. First, we obtain thesame results using a logit estimation procedure. Second, we obtain similarresults when controlling for the degree of private property rights protec-tion, the degree to which regulations restrict the opening and operation ofbusinesses, a measure of bureaucratic efficiency, the rate of economicgrowth, inflation, the existence of a deposit insurance scheme, and the sizeof the financial intermediary sector (Private credit). Thus, we control forthe standard variables used in the large and growing empirical literaturethat tries to explain banking crises. The coefficients on Securities andBanks Owning Nonfinancial Firms remain significantly positive in the cri-sis regressions (when also including Development and Good Govern-ment). Third, as noted earlier, we obtain similar results when using Sys-temic instead of Major as the indicator of whether a country experienceda banking crisis or not. Fourth, we obtain similar results when using thealternative measures of Securities and Bank Ownership of NonfinancialFirms as just discussed. Specifically, we also use the regulatory measuresbased on (a) values from 1 through 3, (b) values of 0 or 1, and (c) valuesof individual dummy variables for each of the values 1 through 4. Thesealternative specifications do not alter the findings. Fifth, these conclusionsare robust to the inclusion of regional dummy variables; the results are notdriven by regional factors. Sixth, because the degree of securities marketdevelopment may influence financial fragility, we also included measuresof the degree of securities market development. Specifically, we used mea-sures of (a) equity market liquidity, (b) the issuance of equity (in the pri-mary market) as a share of GDP, and (c) the issuance of long-term bonds(in the primary market) as a share of GDP. This modification did not alter


Tabl

e2.

11R

elat

ions

hip

Bet

wee

nB

ank

Cri

ses

and

Ban

kR

egul

atio

nsan

dP

olic

ies

Ban

ksSt

ate-

Non

finan

cial

Ow

ning

Ow

ned

Fir

ms

Goo

dR

eal

Non

finan

cial

Ban

kO

wni

ngF

inan

cial

Gov

ernm

ent

Res

tric

tSe

curi

ties

Insu

ranc

eE

stat

eF

irm

sA

sset

sB

anks

Stru

ctur

e

A.C

orre

lati

ons

Ban

kC

risi

s�

0.30

10.

393

0.37

7�

0.00

60.

298

0.41

80.

217

0.18

8�

0.15

7(0

.019

)(0

.002

)(0

.003

)(0

.964

)(0

.020

)(0

.001

)(0

.102

)(0

.161

)(0

.267

)

B.S

impl

eP

robi

tR

egre

ssio

nsB

ank

Cri

sis

�0.

056

0.68

90.

584

�0.

154

0.30

00.

527

0.87

30.

237

�0.

265

(0.3

72)

(0.0

20)

(0.0

15)

(0.4

36)

(0.1

23)

(0.0

10)

(0.2

96)

(0.2

33)

(0.6

43)

No.

ofco

untr

ies

6161

6161

6160

5857

52P

roba

bilit

y(L

R0.

052

0.00

90.

006

0.08

90.

039

0.00

50.

105

0.12

40.

014

stat

)

Not

es:

Sim

ple

prob

itre

gres

sion

sin

clud

ea

cons

tant

,the

loga

rith

mof

real

per

capi

taG

DP,

and

the

vari

able

Goo

dG

over

nmen

t,w

hich

com

bine

sm

easu

res

ofex

prop

riat

ion

risk

,the

law

and

orde

rtr

adit

ion

ofth

eco

untr

y,an

dth

ele

velo

fco

rrup

tion

.The

Goo

dG

over

nmen

tre

gres

sion

incl

udes

Dev

elop

men

ton

ly.

Pro

babi

lity

(LR

stat

isti

c)is

the

p-va

lue

for

the

test

that

the

coeffi

cien

tson

the

(non

cons

tant

)re

gres

sors

equa

lzer

o.N

umbe

rsin

pare

nthe

ses

are

p-va

lues

.

9. For a detailed discussion and analysis of bank-based versus market-based financialsystems, see Allen and Gale (2000) and Levine (2000).

10. The source of the additional variables used in this analysis is Beck, Demirguc-Kunt,and Levine (2001).

the results, and these securities market indicators enter the crisis regres-sions insignificantly. Similarly, we also tried controlling for the net interestincome of banks (Net interest margin), the degree of banking sector con-centration (Bank concentration), and a measure of the degree to whichthe financial system is primarily bank-based or market-based (Structure).9

These additional variables did not enter the crises regressions significantly.Moreover, including these measures did not alter this section’s major con-clusion: There is a positive, significant, and robust relationship betweenbank fragility and regulatory restrictions on securities market activitiesand bank ownership of nonfinancial firms.10

2.3.3 Endogeneity

Endogeneity is an issue that merits further consideration. Countries thatexperience banking crises might have responded to them by adopting regu-latory restrictions on the activities of banks. If this situation actually hap-pened, it would be inappropriate to interpret the results in table 2.11 assuggesting that regulatory restrictions increase the probability that a crisiswill occur. To control for potential simultaneity bias, we have used a two-step instrumental variable estimator. Using instrumental variables did notalter the main results: Countries in which banking systems face greaterregulatory restrictions on securities activities and on owning nonfinancialfirms have a higher probability of suffering a major crisis (see Barth, Cap-rio, and Levine 1999). However, because the instrumental variables are notvery good predictors of regulatory restrictions, we decided to examine theissue of endogeneity using a more laborious—albeit less statistically rigor-ous—procedure.

Table 2.12 presents the results of this effort. As the table indicates, forthose countries in our sample experiencing a crisis, information is providedregarding the dates of the banking crises, the scope of the problems, andthe estimated costs of resolution. In addition, information is providedabout whether or not there was any change in regulations with respect tosecurities, insurance, and real estate activities as well as to the mixing ofbanking and commerce during or shortly after a banking crisis occurred.For some countries and for some time periods, the required regulatoryinformation has not yet been obtained. For the majority of our countries,however, such information was available from publications of the Instituteof International Bankers, materials from the OCC and the World BankSurvey.

Banking crises generally did not induce governments to enact more


Tabl

e2.

12B

anki

ngC

rise

s:D

ates

,Cos

tsan

dB

ank

Reg

ulat

ory

Res

pons

es

Cod

ing

of

Cha

nge

inR

egul

atio

nsfo

rA

llow

able

Act

ivit

ies:

Yes

orN

o

Ban

king

Cri

ses

Ban

kN

onfin

anci

alE

stim

ate

Ow

ners

hip

ofF

irm

Yea

rof

ofTo

tal

Non

finan

cial

Ow

ners

hip

Cri

sis

Scop

eof

Pro

blem

Los

ses/

Cos

tsSe

curi

ties

Insu

ranc

eR

ealE

stat

eF

irm

sof

Ban

ksSy

stem

icM

ajor

Arg

enti

na19

80–8

2aM

ore

than

7055

.3p

erce

ntof

n.a.

n.a.

n.a.

n.a.

n.a.

11

inst

itut

ions

wer

eG

DP.

liqui

date

dor

subj

ect

toce

ntra

lban

kin

terv

enti

onac

coun

ting

for

16p

erce

ntof

asse

tsof

com

mer

cial

bank

san

d35

per

cent

ofto

tala

sset

sof

finan

ceco

mpa

nies

.19

89–9

0aN

onp

erfo

rmin

gY

es,s

ince

No

No

No

No

asse

tsco

nsti

tute

d27

1991

,allo

wed

per

cent

ofth

eto

act

asag

greg

ate

port

folio

unde

rwri

ter

inan

d37

per

cent

ofth

eis

suin

gpr

ivat

epo

rtfo

lios

ofst

ate-

debt

.ow

ned

bank

s.F

aile

dba

nks

held

40p

erce

ntof

finan

cial

syst

emas

sets

.19

95a

Susp

ensi

onof

eigh

tD

irec

tan

dN

oN

oN

oN

oN

oba

nks

and

colla

pse

indi

rect

cost

toof

thre

eba

nks.

publ

ices

tim

ated

Ove

rall

thro

ugh

the

at1.

6p

erce

ntof

end

of19

97,6

3ou

tG

DP.

of20

5ba

nkin

gin

stit

utio

nsw

ere

eith

ercl

osed

orm

erge

d.

Bol

ivia

1986

–87a

Fiv

eba

nks

wer

en.

a.n.

a.n.

a.n.

a.n.

a.1

1liq

uida

ted.

Tota

lN

PL

sof

bank

ing

syst

emre

ache

d29

.8p

erce

ntin

1987

;in

mid

-198

8re

port

edar

rear

sst

ood

at92

per

cent

ofco

mm

erci

alba

nks’

net

wor

th.

1994

aT

wo

bank

sw

ith

11N

oN

oN

oN

oN

op

erce

ntof

bank

ing

syst

emas

sets

wer

ecl

osed

inN

ovem

ber

1994

.In

1995

,fou

rou

tof

15do

mes

tic

bank

s,w

hich

acco

unte

dfo

r30

per

cent

ofba

nkin

gsy

stem

asse

tsex

per

ienc

edliq

uidi

typr

oble

ms

and

suff

ered

from

high

leve

lsof

NP

Ls.

Bra

zil

1990

a(d

epos

itto

bond

No

No

No

No

No

11

conv

ersi

on)

1994

–B

yen

d19

97,t

heIn

1996

,N

oN

oN

oN

oN

oon

goin

gaC

entr

alB

ank

had

nega

tive

net

inte

rven

edin

,or

wor

thof

put

unde

rth

ese

lect

edst

ate

Tem

pora

rySp

ecia

lan

dfe

dera

lA

dmin

istr

atio

nfu

nds

bank

sR

egim

e(R

AE

T)

esti

mat

edat

syst

em,4

3fin

anci

al5–

10p

erce

ntof

inst

itut

ions

.Als

oG

DP.

Cos

tsof

byen

d19

97in

divi

dual

bank

nonp

erfo

rmin

glo

ans

reca

pita

lizat

ion,

ofth

een

tire

bank

ing

byen

d19

97:

(con

tinu

ed)

syst

emha

dre

ache

dB

anco

15p

erce

nt.

Eco

nom

ico,

USD

2.9

billi

on;

Bam

erid

us,

USD

3bi

llion

;B

anco

doB

razi

l,U

SD8

billi

on.

Can

ada

1983

–85b

Fif

teen

mem

bers

ofN

o,bu

tN

o,bu

tN

oN

oN

o0

1th

eC

anad

ian

chan

ged

from

chan

ged

from

Dep

osit

Insu

ranc

epr

ohib

ited

topr

ohib

ited

toC

orpo

rati

on,

per

mit

ted

inp

erm

itte

din

incl

udin

gtw

oba

nks,

1987

.19

92.

faile

d.C

hile

1981

–83a

Aut

hori

ties

1982

–85:

No,

but

No,

but

No,

but

No

No,

but

inte

rven

edin

four

gove

rnm

ent

chan

ged

from

star

ting

star

ting

inch

ange

dfr

omba

nks

and

four

spen

t41

.2re

stri

cted

toin

1997

1993

bank

sun

rest

rict

edno

nban

kfin

anci

alp

erce

ntof

GD

P.p

erm

itte

din

bank

sw

ere

wer

eal

low

edto

per

mit

ted

inst

itut

ions

(wit

h19

97/9

8.al

low

edto

toin

vest

inin

1993

.33

per

cent

ofin

term

edia

tere

ales

tate

outs

tand

ing

loan

s)(s

ell)

thro

ugh

in19

81.I

n19

83,

insu

ranc

esu

bsid

iari

esse

ven

bank

san

dth

roug

hth

aton

efin

anci

era

subs

idia

ries

.sp

ecia

lized

inac

coun

ting

for

45(h

ousi

ngan

dp

erce

ntof

tota

loffi

cesp

ace)

asse

ts.B

yth

een

dof

leas

ing.

1983

,19

per

cent

oflo

ans

wer

eno

nper

form

ing.

Tabl

e2.

12(c

onti

nued

)

Cod

ing

of

Cha

nge

inR

egul

atio

nsfo

rA

llow

able

Act

ivit

ies:

Yes

orN

o

Ban

king

Cri

ses

Ban

kN

onfin

anci

alE

stim

ate

Ow

ners

hip

ofF

irm

Yea

rof

ofTo

tal

Non

finan

cial

Ow

ners

hip

Cri

sis

Scop

eof

Pro

blem

Los

ses/

Cos

tsSe

curi

ties

Insu

ranc

eR

ealE

stat

eF

irm

sof

Ban

ksSy

stem

icM

ajor

Col

ombi

a19

82–8

7aC

entr

alB

ank

Cos

tsof

No

No,

but

No

No,

but

No

11

inte

rven

edin

six

rest

ruct

urin

gch

ange

dfr

omch

ange

dfr

omba

nks

acco

unti

nges

tim

ated

top

erm

itte

dto

per

mit

ted

tofo

r25

per

cent

ofbe

arou

nd5

proh

ibit

edin

proh

ibit

edin

bank

ing

syst

emp

erce

ntof

GD

P.19

98.

1994

.as

sets

.D

enm

ark

1987

–92b

Cum

ulat

ive

loan

No

No

No

No

No

01

loss

esov

erth

ep

erio

d19

90–9

2w

ere

9p

erce

ntof

loan

s;40

ofth

e60

prob

lem

bank

sw

ere

mer

ged.

Ecu

ador

earl

yIm

plem

enta

tion

ofn.

a.n.

a.n.

a.n.

a.n.

a.1

119

80sa

exch

ange

prog

ram

(dom

esti

cfo

rfo

reig

nde

bt)

toba

ilou

tba

nkin

gsy

stem

1996

–A

utho

riti

esn.

a.n.

a.n.

a.n.

a.n.

a.on

goin

gain

terv

ened

inse

vera

lsm

alle

rfin

anci

alin

stit

utio

nsin

late

1995

toea

rly

1996

and

inth

efif

thla

rges

tco

mm

erci

alba

nkin

1996

.Sev

enfin

anci

alin

stit

utio

ns,

whi

chac

coun

ted

for

25–3

0p

erce

ntof

com

mer

cial

bank

ing

asse

ts,w

ere

clos

edin

1998

/99.

InM

arch

1999

,aut

hori

ties

decl

ared

aon

ew

eek

bank

holid

ay.

Egy

pt,A

rab

earl

yG

over

nmen

tcl

osed

Nin

est

ate-

n.a.

n.a.

n.a.

n.a.

n.a.

11

Rep

.19

80sa

seve

rall

arge

owne

din

vest

men

tco

mm

erci

alco

mpa

nies

.Fou

rba

nks

reco

rded

(con

tinu

ed)

publ

icse

ctor

bank

sN

PL

rati

osof

wer

egi

ven

capi

tal

37p

erce

nton

assi

stan

ce.

aver

age

in19

89.

1991

–95b

Fou

rpu

blic

sect

orn.

a.n.

a.n.

a.n.

a.n.

a.ba

nks

wer

egi

ven

capi

tala

ssis

tanc

e.E

lSal

vado

r19

89a

Nin

est

ate-

owne

dn.

a.n.

a.n.

a.n.

a.n.

a.1

1co

mm

erci

alba

nks

reco

rded

NP

Lra

tios

of37

per

cent

onav

erag

ein

1989

.F

inla

nd19

91–9

4aSa

ving

sba

nkin

gR

ecap

.cos

tsN

oN

oN

oN

oN

o1

1se

ctor

badl

yaff

ecte

d;am

ount

edto

11G

over

nmen

tto

okp

erce

ntof

GD

P.co

ntro

lof

thre

eba

nks

that

toge

ther

acco

unte

dfo

r31

per

cent

ofto

tal

syst

emde

posi

ts.

Gha

na19

82–8

9aSe

ven

audi

ted

bank

sR

estr

uctu

ring

n.a.

n.a.

n.a.

n.a.

n.a.

11

(out

of11

)in

solv

ent;

cost

ses

tim

ated

rura

lban

king

sect

orat

6p

erce

ntof

affec

ted.

GN

P.19

97–

NP

Lle

vels

incr

ease

dO

nela

rge

No

No

No

No

No

ongo

ingb

shar

ply

duri

ng19

97in

vest

men

tfr

om15

.5p

erce

ntof

bank

fails

.lo

ans

outs

tand

ing

toN

onp

erfo

rmin

g26

.5p

erce

nt.T

wo

asse

tsof

the

27st

ate-

owne

dpu

blic

sect

orco

mm

erci

alba

nks

bank

ses

tim

ated

Tabl

e2.

12(c

onti

nued

)

Cod

ing

of

Cha

nge

inR

egul

atio

nsfo

rA

llow

able

Act

ivit

ies:

Yes

orN

o

Ban

king

Cri

ses

Ban

kN

onfin

anci

alE

stim

ate

Ow

ners

hip

ofF

irm

Yea

rof

ofTo

tal

Non

finan

cial

Ow

ners

hip

Cri

sis

Scop

eof

Pro

blem

Los

ses/

Cos

tsSe

curi

ties

Insu

ranc

eR

ealE

stat

eF

irm

sof

Ban

ksSy

stem

icM

ajor

acco

unti

ngfo

r33

.9at

19.5

per

cent

per

cent

ofm

arke

tof

tota

lloa

nssh

are

inba

dsh

ape.

and

adva

nces

asT

hree

bank

s,of

end

ofM

arch

acco

unti

ngfo

r3.

619

95.

per

cent

ofm

arke

tN

onp

erfo

rmin

gsh

are

inte

rms

ofas

sets

toto

tal

depo

sits

faile

d.as

sets

reac

hed

Seve

nba

nks

or10

.8p

erce

ntin

Dep

osit

Tak

ing

1993

–94.

At

end

Inst

itut

ions

wer

e19

98,N

PL

sei

ther

liqui

date

dor

esti

mat

edat

16ta

ken

over

.p

erce

ntof

tota

l.H

ong

Kon

g19

82–8

3bN

ine

Dep

osit

Tak

ing

n.a.

n.a.

n.a.

n.a.

n.a.

11

Com

pani

esfa

iled.

1983

–86b

Seve

nba

nks

orn.

a.n.

a.n.

a.n.

a.n.

a.D

epos

itT

akin

gIn

stit

utio

nsw

ere

eith

erliq

uida

ted

orta

ken

over

.19

98b

One

larg

ein

vest

men

tN

oN

oN

oN

oN

oba

nkfa

ils.

Indi

a19

93–

Non

per

form

ing

No

No

No

No

No

01

ongo

ingb

asse

tsof

the

27pu

blic

sect

orba

nks

esti

mat

edat

19.5

per

cent

ofto

tall

oans

and

adva

nces

asof

end

ofM

arch

1995

.N

onp

erfo

rmin

gas

sets

toto

tala

sset

sre

ache

d10

.8p

erce

ntin

1993

–94.

At

end

1998

,NP

Ls

esti

mat

edat

16p

erce

ntof

tota

llo

ans.

(con

tinu

ed)

Indo

nesi

a19

94b

Cla

ssifi

edas

sets

Rec

apit

ali-

Yes

,aN

oN

oN

oN

o1

1eq

ualt

oov

er14

zati

onco

stfo

rre

gula

tion

per

cent

ofba

nkin

gfiv

est

ate

bank

spr

ohib

itin

gsy

stem

asse

tsw

ith

exp

ecte

dto

bank

sfr

omov

er70

per

cent

inam

ount

to1.

8un

derw

riti

ngth

est

ate

bank

s.p

erce

ntof

GD

P.se

curi

ties

was

issu

edin

Aug

.19

95.T

hede

cree

how

ever

allo

wed

bank

sto

act

asar

rang

er,

issu

er,d

eale

r,in

vest

oror

buyi

ngag

ent.

1997

–A

sof

Mar

ch19

99,

Fis

calc

osts

No

No

No

No

No

ongo

inga

Ban

kof

Indo

nesi

aes

tim

ated

toha

dcl

osed

dow

nra

nge

from

61ba

nks

and

50–5

5p

erce

ntof

nati

onal

ized

54G

DP.

bank

s,of

ato

talo

f24

0.N

PL

ses

tim

ates

for

the

tota

lban

king

syst

emra

nge

from

65–7

5p

erce

ntof

tota

lloa

ns.

Ital

y19

90–9

5bD

urin

g19

90–9

4,58

No

No

No

No,

but

No

01

bank

s(a

ccou

ntin

gch

ange

dfr

om

Tabl

e2.

12(c

onti

nued

)

Cod

ing

of

Cha

nge

inR

egul

atio

nsfo

rA

llow

able

Act

ivit

ies:

Yes

orN

o

Ban

king

Cri

ses

Ban

kN

onfin

anci

alE

stim

ate

Ow

ners

hip

ofF

irm

Yea

rof

ofTo

tal

Non

finan

cial

Ow

ners

hip

Cri

sis

Scop

eof

Pro

blem

Los

ses/

Cos

tsSe

curi

ties

Insu

ranc

eR

ealE

stat

eF

irm

sof

Ban

ksSy

stem

icM

ajor

for

11p

erce

ntof

proh

ibit

edto

tota

llen

ding

)w

ere

rest

rict

edin

mer

ged

wit

hot

her

1995

.in

stit

utio

ns.

Japa

n19

90sa

Ban

kssu

ffer

ing

from

In19

96,r

escu

eN

oN

oN

oN

oN

o1

1sh

arp

decl

ine

inco

sts

esti

mat

edst

ock

mar

ket

and

atov

erU

SDre

ales

tate

pric

es;

100

bn.I

n19

98,

offici

ales

tim

ate

ofgo

vern

men

tN

PL

s:40

trill

ion

yen

ofJa

pan

(US$

469

billi

on)

inan

noun

ced

the

1995

(10

per

cent

ofO

buch

iPla

nG

DP

);un

offici

alw

hich

prov

ides

esti

mat

espu

tN

PL

s60

trill

ion

yen

at1

trill

ion

or25

(US$

500

per

cent

ofG

DP

;for

billi

on),

abou

tso

me

ofba

dlo

ans,

12.3

per

cent

bank

sha

veal

read

yof

GD

P,in

mad

epr

ovis

ions

.At

publ

icfu

nds

for

the

end

of19

98,t

otal

loan

loss

es,

bank

ing

syst

emre

capi

taliz

atio

nN

PL

ses

tim

ated

atof

bank

san

dye

n87

.5tr

illio

nde

posi

tor

(US$

725

billi

on),

prot

ecti

on.

abou

t17

.9p

erce

ntof

GD

P.In

Mar

ch19

99,H

akka

ido

Tak

usho

duba

nkcl

osed

,Lon

gT

erm

Cre

dit

Ban

kna

tion

alis

ed;

Yat

suda

Tru

stm

erge

dw

ith

Fuj

iB

ank,

and

Mit

sui

Tru

stm

erge

dw

ith

Chu

oT

rust

.R

epub

licof

1997

–B

yM

arch

1999

,tw

oF

isca

lcos

tsof

No

No,

but

No

No

No

11

Kor

eaon

goin

gaou

tof

26co

mm

erci

alcr

isis

esti

mat

edch

ange

dfr

om(c

onti

nued

)

bank

sac

coun

ting

for

tore

ach

34pr

ohib

ited

to11

.8p

erce

ntof

tota

lp

erce

ntin

1999

.p

erm

itte

din

bank

ing

syst

em19

95.

asse

tsna

tion

aliz

ed;5

bank

s,ac

coun

ting

for

7.8

per

cent

ofto

talb

anki

ngsy

stem

asse

tscl

osed

.Sev

enba

nks

acco

unti

ngfo

r38

per

cent

ofba

nkin

gsy

stem

asse

ts,p

lace

dun

der

spec

ials

uper

visi

on.

Ove

rall,

bank

ing

syst

emN

PL

exp

ecte

dto

pea

kat

30–4

0p

erce

nt.

Mad

agas

car

1988

a25

per

cent

ofN

oN

oN

on.

a.n.

a.1

1ba

nkin

gse

ctor

loan

sde

emed

irre

cove

rabl

e.M

alay

sia

1985

–88b

Inso

lven

tin

stit

utio

nsR

epor

ted

loss

esn.

a.n.

a.n.

a.n.

a.n.

a.1

1ac

coun

tfo

r3.

4eq

uiva

lent

to4.

7p

erce

ntof

finan

cial

per

cent

ofG

NP.

syst

emde

posi

ts;

mar

gina

llyca

pita

lized

and

per

haps

inso

lven

tin

stit

utio

nsac

coun

tfo

ran

othe

r4.

4

Tabl

e2.

12(c

onti

nued

)

Cod

ing

of

Cha

nge

inR

egul

atio

nsfo

rA

llow

able

Act

ivit

ies:

Yes

orN

o

Ban

king

Cri

ses

Ban

kN

onfin

anci

alE

stim

ate

Ow

ners

hip

ofF

irm

Yea

rof

ofTo

tal

Non

finan

cial

Ow

ners

hip

Cri

sis

Scop

eof

Pro

blem

Los

ses/

Cos

tsSe

curi

ties

Insu

ranc

eR

ealE

stat

eF

irm

sof

Ban

ksSy

stem

icM

ajor

per

cent

offin

anci

alsy

stem

sde

posi

ts.

1997

–F

inan

ceco

mpa

nyN

etlo

ssN

o,bu

tN

o,bu

tN

oN

o,bu

tN

oon

goin

gase

ctor

isbe

ing

esti

mat

edat

chan

ged

from

chan

ged

from

chan

ged

from

rest

ruct

ured

and

USD

14.9

bn,o

rre

stri

cted

tore

stri

cted

tore

stri

cted

tonu

mbe

rof

finan

ce20

.5p

erce

ntof

per

mit

ted

inp

erm

itte

din

per

mit

ted

inco

mpa

nies

isto

beG

DP

by19

99.

1991

.19

91.

1991

.re

duce

dfr

om39

to16

thro

ugh

mer

gers

.T

wo

finan

ceco

mpa

nies

wer

eta

ken

over

byC

entr

alB

ank

incl

udin

gM

Bf

Fin

ance

,the

larg

est

inde

pen

dent

finan

ceco

mpa

ny.T

wo

bank

s,de

emed

inso

lven

t,ac

ount

ing

for

14.2

per

cent

offin

anci

alsy

stem

asse

ts,t

obe

mer

ged

wit

hot

her

bank

s.O

vera

ll,at

end

1998

,N

PL

ses

tim

ated

betw

een

25–3

5p

erce

ntof

tota

lba

nkin

gsy

stem

asse

ts.

Mex

ico

1981

/82

Gov

ernm

ent

took

n.a.

n.a.

n.a.

n.a.

n.a.

11

(per

haps

over

trou

bled

unti

lba

nkin

gsy

stem

.re

priv

a-ti

zed

1990

/91

)a

1995

–O

utof

34D

istr

esse

dN

oN

oN

oN

oN

oon

goin

gaco

mm

erci

alba

nks

asba

nks

of19

94,n

ine

bank

sac

coun

ted

for

(con

tinu

ed)

wer

ein

terv

ened

in3.

9p

erce

ntof

and

11m

ore

bank

sba

nkin

gsy

stem

part

icip

ated

inth

eas

sets

.lo

an/p

urch

ase

reca

pita

lizat

ion

prog

ram

.The

seni

nein

terv

ened

bank

sac

coun

ted

for

18.9

per

cent

ofto

tal

finan

cial

syst

emas

sets

and

wer

ede

emed

inso

lven

t;19

93:i

nsol

vent

bank

sac

coun

tfo

r20

per

cent

ofto

tal

asse

tsan

d22

per

cent

ofba

nkin

gsy

stem

depo

sits

;199

5:al

mos

tha

lfof

the

bank

sre

port

edto

bein

finan

cial

dist

ress

.N

iger

ia19

90sa

1993

:ins

olve

ntN

oN

oN

oN

oN

o1

1ba

nks

acco

unt

for

20p

erce

ntof

tota

las

sets

and

22p

erce

ntof

bank

ing

syst

emde

posi

ts;1

995:

alm

ost

half

ofth

eba

nks

repo

rted

tobe

infin

anci

aldi

stre

ss.

Tabl

e2.

12(c

onti

nued

)

Cod

ing

of

Cha

nge

inR

egul

atio

nsfo

rA

llow

able

Act

ivit

ies:

Yes

orN

o

Ban

king

Cri

ses

Ban

kN

onfin

anci

alE

stim

ate

Ow

ners

hip

ofF

irm

Yea

rof

ofTo

tal

Non

finan

cial

Ow

ners

hip

Cri

sis

Scop

eof

Pro

blem

Los

ses/

Cos

tsSe

curi

ties

Insu

ranc

eR

ealE

stat

eF

irm

sof

Ban

ksSy

stem

icM

ajor

1997

bD

istr

esse

dba

nks

No

No

No

No

No

acco

unte

dfo

r3.

9p

erce

ntof

bank

ing

syst

emas

sets

.N

orw

ay19

87–9

3aC

entr

alB

ank

Rec

apit

aliz

atio

nN

oN

oN

oN

oN

o1

1pr

ovid

edsp

ecia

lco

sts

amou

nted

loan

sto

six

bank

s,to

8p

erce

ntof

suff

erin

gfr

ompo

st-

GD

P.oi

lrec

essi

onof

1985

–86

and

from

prob

lem

real

esta

telo

ans;

stat

eto

okco

ntro

lof

thre

ela

rges

tba

nks

(equ

ival

ent

to85

per

cent

ofba

nkin

gsy

stem

asse

ts,w

hose

loan

loss

esha

dw

iped

out

capi

tal)

,pa

rtly

thro

ugh

aG

over

nmen

tB

ank

Inve

stm

ent

Fun

d(N

kr5

billi

on)

and

the

stat

e-ba

cked

Ban

kIn

sura

nce

Fun

dha

dto

incr

ease

capi

talt

oN

kr11

billi

on.

Per

u19

83–9

0aT

wo

larg

eba

nks

No

No

No

No

No

11

faile

d.T

here

stof

the

syst

emsu

ffer

edfr

omhi

ghle

vels

ofno

nper

form

ing

loan

san

dfin

anci

aldi

sint

erm

edia

tion

follo

win

gth

ena

tion

aliz

atio

nof

the

bank

ing

syst

emin

1987

.(c

onti

nued

)

The

Phi

lippi

nes

1981

–87a

Tw

opu

blic

bank

sA

tit

sp

eak,

n.a.

n.a.

n.a.

n.a.

n.a.

11

acco

unti

ngfo

r50

cent

ralb

ank

per

cent

ofba

nkin

gas

sist

ance

tosy

stem

asse

ts,s

ixfin

anci

alpr

ivat

eba

nks

inst

itut

ions

acco

unti

ngfo

r12

amou

nted

top

erce

ntof

bank

ing

19.1

bnp

esos

(3sy

stem

asse

ts,3

2p

erce

ntof

thri

fts

acco

unti

ngfo

rG

DP

).53

.2p

erce

ntof

thri

ftba

nkin

gas

sets

and

128

rura

lban

ks.

1998

–Si

nce

Janu

ary

1998

,N

etlo

ssN

oN

oN

oN

oN

oon

goin

gaon

eco

mm

erci

ales

tim

ated

atba

nk,s

even

out

ofU

SD4.

0bn

,or

88th

rift

san

d40

out

6.7

per

cent

ofof

750

rura

lban

ksG

DP

by19

99.

have

been

plac

edun

der

rece

iver

ship

.B

anki

ngsy

stem

NP

Ls

reac

hed

10.8

per

cent

byA

ugus

tof

1998

and

12.4

per

cent

byN

ovem

ber

1998

.E

xpec

ted

tore

ach

20p

erce

ntin

1999

.Sr

iLan

ka19

89–9

3aSt

ate-

owne

dba

nks

Res

truc

turi

ngn.

a.n.

a.n.

a.n.

a.n.

a.1

1co

mpr

isin

g70

cost

amou

nted

per

cent

ofba

nkin

gto

25bn

rup

ees

Tabl

e2.

12(c

onti

nued

)

Cod

ing

of

Cha

nge

inR

egul

atio

nsfo

rA

llow

able

Act

ivit

ies:

Yes

orN

o

Ban

king

Cri

ses

Ban

kN

onfin

anci

alE

stim

ate

Ow

ners

hip

ofF

irm

Yea

rof

ofTo

tal

Non

finan

cial

Ow

ners

hip

Cri

sis

Scop

eof

Pro

blem

Los

ses/

Cos

tsSe

curi

ties

Insu

ranc

eR

ealE

stat

eF

irm

sof

Ban

ksSy

stem

icM

ajor

syst

emes

tim

ated

to(5

per

cent

ofha

veno

nper

form

ing

GD

P).

loan

rati

oof

abou

t35

per

cent

.Sw

eden

1991

aN

ordb

anke

nan

dC

ost

ofN

oN

oN

oY

es,c

hang

edN

o1

1G

ota

Ban

kin

solv

ent,

reca

pita

lizat

ion

from

acco

unti

ngfo

r21

.6am

ount

edto

4pr

ohib

ited

top

erce

ntof

tota

lp

erce

ntof

GD

P.re

stri

cted

inba

nkin

gsy

tem

Aug

ust

1991

.as

sets

.Spa

rban

ken

For

esta

inte

rven

ed,

acco

unti

ngfo

r24

per

cent

ofto

tal

bank

ing

syst

emas

sets

.Ove

rall,

five

ofsi

xla

rges

tba

nks,

acco

unti

ngfo

rov

er70

per

cent

ofba

nkin

gsy

stem

asse

tsex

per

ienc

eddi

fficu

ltie

s.T

anza

nia

Lat

e19

87:t

hem

ain

1987

:im

plie

dn.

a.n.

a.n.

a.n.

a.n.

a.1

119

80s;

finan

cial

inst

itut

ions

loss

esam

ount

1990

saha

dar

rear

sto

near

ly10

amou

ntin

gto

half

ofp

erce

ntof

GN

P.th

eir

port

folio

;199

5:T

heN

atio

nalB

ank

ofC

omm

erce

whi

chac

coun

ted

for

95p

erce

ntof

bank

ing

syst

emas

sets

,in

solv

ent

sinc

e19

90–9

2,po

ssib

lylo

nger

.T

haila

nd19

83–8

7aA

utho

riti

esG

over

nmen

tn.

a.n.

a.n.

a.n.

a.n.

a.1

1in

terv

ened

in50

cost

for

50fin

ance

and

secu

rity

finan

cefir

ms

and

5co

mpa

nies

com

mer

cial

bank

sor

esti

mat

edat

0.5

(con

tinu

ed)

abou

t25

per

cent

ofp

erce

ntof

GN

P;

tota

lfina

ncia

lsys

tem

gove

rnm

ent

cost

asse

ts;3

com

mer

cial

for

subs

idiz

edba

nks

judg

edlo

ans

amou

nted

inso

lven

t(1

4.1

toab

out

0.2

per

cent

ofp

erce

ntof

GD

Pco

mm

erci

alba

nkin

gan

nual

ly.

asse

ts).

1997

–U

pto

Mar

ch19

99,

Net

loss

esN

oN

oN

oN

oN

oon

goin

gaB

ank

ofT

haila

ndes

tim

ated

atin

terv

ened

in70

USD

59.7

bn,o

rfin

ance

com

pani

es42

.3p

erce

ntof

(out

of91

)w

hich

GD

Pin

1999

.to

geth

erac

coun

ted

for

12.8

per

cent

offin

anci

alsy

stem

asse

tsof

72p

erce

ntof

finan

ceco

mpa

nyas

sets

.It

also

inte

rven

edin

six

bank

sth

atto

geth

erha

da

mar

ket

shar

eof

12.3

per

cent

.At

end

1998

,ban

king

syts

emN

PL

sha

d

Tabl

e2.

12(c

onti

nued

)

Cod

ing

of

Cha

nge

inR

egul

atio

nsfo

rA

llow

able

Act

ivit

ies:

Yes

orN

o

Ban

king

Cri

ses

Ban

kN

onfin

anci

alE

stim

ate

Ow

ners

hip

ofF

irm

Yea

rof

ofTo

tal

Non

finan

cial

Ow

ners

hip

Cri

sis

Scop

eof

Pro

blem

Los

ses/

Cos

tsSe

curi

ties

Insu

ranc

eR

ealE

stat

eF

irm

sof

Ban

ksSy

stem

icM

ajor

reac

hed

46p

erce

ntof

tota

lloa

ns.

Tur

key

1994

bT

hree

bank

sfa

iled

Up

toJu

neN

oN

oN

oN

oY

es,c

hang

ed1

1in

Apr

il19

94.

1994

,fr

omau

thor

itie

sun

rest

rict

edsp

ent

1.1

top

erm

itte

d.p

erce

ntof

GD

P.A

sof

1993

,ba

nks

may

only

acqu

ire

shar

es,

incl

udin

gbo

nus

shar

es,

ofa

nonfi

nanc

ial

firm

upto

am

axim

umof

15p

erce

ntof

thei

row

nfu

nd,a

ndth

eto

tals

umof

inve

stm

ent

inth

ese

com

pani

esm

ayno

tex

ceed

60p

erce

ntof

the

bank

s’to

tal

fund

s.U

nite

dSt

ates

1984

–91b

Mor

eth

an1,

400

Cos

tof

No

No

No

No

No

01

savi

ngs

&lo

ans

and

savi

ngs

&lo

an1,

300

bank

sfa

iled.

clea

nup

amou

nted

toan

(con

tinu

ed)

esti

mat

edU

SD18

0bi

llion

equi

vale

ntto

3.2

per

cent

ofG

DP.

Uru

guay

1981

–84a

Aff

ecte

din

stit

utio

nsC

osts

ofn.

a.n.

a.n.

a.n.

a.n.

a.1

1ac

coun

ted

for

30re

capi

taliz

ing

per

cent

offin

anci

alba

nks

esti

mat

edsy

stem

asse

ts;

atU

SD35

0in

solv

ent

bank

sm

illio

n(7

acco

unte

dfo

r20

per

cent

ofp

erce

ntof

finan

cial

GN

P);

Cen

tral

syst

emde

posi

ts.

Ban

k’s

quas

i-fis

call

osse

sas

soci

ated

wit

hsu

bsid

ized

cred

itop

erat

ions

and

purc

hase

oflo

anpo

rtfo

lios

amou

nted

to24

.2p

erce

ntof

GD

Pdu

ring

1982

–85.

Tabl

e2.

12(c

onti

nued

)

Cod

ing

of

Cha

nge

inR

egul

atio

nsfo

rA

llow

able

Act

ivit

ies:

Yes

orN

o

Ban

king

Cri

ses

Ban

kN

onfin

anci

alE

stim

ate

Ow

ners

hip

ofF

irm

Yea

rof

ofTo

tal

Non

finan

cial

Ow

ners

hip

Cri

sis

Scop

eof

Pro

blem

Los

ses/

Cos

tsSe

curi

ties

Insu

ranc

eR

ealE

stat

eF

irm

sof

Ban

ksSy

stem

icM

ajor

Ven

ezue

laL

ate

Not

able

bank

n.a.

n.a.

n.a.

n.a.

n.a.

11

1970

sbfa

ilure

s:B

anco

and

Nac

iona

lede

1980

sD

escu

ento

(197

8);

BA

ND

AG

RO

(198

1);B

anco

delo

sT

raba

jado

res

deV

enez

uela

(198

2);

Ban

code

Com

erci

o(1

985)

;BH

CU

(198

5);B

HC

O(1

985)

;Ban

coL

ara

(198

6).

1994

–In

solv

ent

bank

sN

oN

oN

oN

oN

oon

goin

gaac

coun

ted

for

30p

erce

ntof

finan

cial

syst

emde

posi

ts.

Aut

hori

ties

inte

rven

edin

13ou

tof

47ba

nks

whi

chhe

ld50

per

cent

ofde

posi

tsin

1994

,and

infiv

ead

diti

onal

bank

sin

1995

.Z

imba

bwe

1995

–T

wo

out

offiv

eN

oN

oN

oN

oN

o1

1on

goin

gaco

mm

erci

alba

nks

reco

rded

high

NP

Lra

tio.

Sou

rces

:A

utho

rs,b

ased

onC

apri

oan

dK

linge

biel

(199

9);G

loba

lSur

vey,

Inst

itut

eof

Inte

rnat

iona

lBan

kers

,var

ious

year

s;an

dth

eO

ffice

ofth

eC

ompt

rolle

rof

the

Cur

renc

y.

Not

e:n.

a.�

not

avai

labl

e.aSy

stem

icba

nkin

gcr

ises

.bN

onsy

stem

icba

nkin

gcr

ises

.

11. The inability to make limits on powers stick may be one reason for this trend. Bandieraand colleagues (1999) characterized financial reforms as a vector of variables pertaining tochanges over long periods of time in interest rate regulation, reserve requirements, directedcredit, bank ownership (moves toward privatization), liberalization of securities markets,prudential regulation, and international financial liberalization. They did not includechanges in banks’ powers insofar as there were so few changes. Note also that in the particu-lar case of the United States, banks were allowed to underwrite corporate debt in 1989 andcorporate equity in 1990 through subsidiaries, but subject to a revenue restriction. In 1999there were more than forty banking organizations that had established such subsidiaries.

12. In this respect, Kwan and Laderman (1999, 24), in a review of literature pertaining tothe United States, state that “On the effects of securities activities on banking organizations’safety and soundness, the bulk of empirical evidence indicated some potential for risk reduc-tion in expanding banks’ securities powers.”

restrictive regulations. Indeed, the overall indication is that there was notmuch change in these regulations: Of the 250 possible entries in the table,141 showed no subsequent change at all (neither during nor immediatelyafter the crisis), 14 showed a change in the direction of fewer restrictions(only 2 of which could be linked to a crisis), and only 3 showed greaterrestrictions after the crisis; in 92 cases we have no data. Thus, even in therelatively few cases in which there was a change during or after a crisis, itwas in the direction of broader powers for banks, meaning that we were us-ing fewer restrictions than actually existed. This biases the results againstthe conclusion that greater restrictions increase the likelihood of a crisis.

Governments generally do respond to banking crises, but the responsehas typically been in the direction of limiting the bank safety net or raisingits cost, as in the cases of the early crises from the 1980s in Argentina andChile, rather than attempting to restrict banks’ powers. Interestingly, bothcountries in fact have moved in the other direction, providing added pow-ers to banks, which is consistent with the general trend toward broaderpowers. More generally, any concern about the endogeneity in the crisisregressions would appear to be unwarranted.11 Reestimating the probit re-gressions in table 2.11 with the data from table 2.12, moreover, does notproduce any significant changes.

Thus, although the analysis does not fully resolve the endogeneity issue,the results clearly suggest that greater regulatory restrictions on the abilityof commercial banks to engage in securities activities and the ability ofcommercial banks to own and control nonfinancial firms tend to increasethe probability that a country will experience a major banking crisis.12

2.4 Summary and Conclusions

The purposes of this paper have been twofold. The first is to presentcomprehensive and detailed information on the regulatory environmentand ownership structure of commercial banks in a large number of coun-tries around the world. There is substantial variation among the more thansixty countries in our sample about what banks are allowed to do with


respect to securities, insurance, and real estate activities. A bank in onecountry, in other words, is not necessarily the same as a bank in anothercountry. As a result of all the banking crises in different countries in recentyears, there have been numerous calls for banking reforms. Yet, they typi-cally fail to address the issue of exactly which regulatory environment ismost appropriate for simultaneously promoting bank performance andstability. The information presented here helps one address this issue byinitially recognizing the substantial cross-country variation that exists inbank regulation. This variation occurs, moreover, in countries that differ interms of geographical location and level of economic development, amongother ways. At the same time, it is found that state ownership of banksvaries from a high of 80 percent to a low of 0 percent in our sample ofcountries.

The second purpose is to assess whether or not it matters what a bankis permitted to do with respect to securities, insurance, and real estateactivities. As summarized in table 2.13, whether restrictions are placed onsecurities activities matters most. The tighter the restrictions placed onthis activity, on average, the more inefficient banks are and the greater thelikelihood of a banking crisis is. The likelihood of a banking crisis is alsogreater, on average, the tighter are the restrictions placed on bank owner-ship of nonfinancial firms. Perhaps surprisingly, not one of these restric-tions produces any beneficial effects with respect to financial development,nonbank sector and stock market development, or industrial competition.Nor is it found that any of them lessen the likelihood of a banking crisisor enhance bank efficiency. At the same time, the greater the share ofbank assets controlled by state-owned banks, on average, the less financialdevelopment as well as the development of the nonbank sector and thestock market will be.

It is important to emphasize that this paper is the product of an ongoingresearch project. Thus, as more information is collected and analyzed, thefindings and conclusions reported here may be modified. This means thatthe paper actually represents a progress report on a timely and importantpublic policy issue. Much more work remains. We are in the process ofcollecting and analyzing information on supervision. Optimal regulatoryrestrictions may depend importantly on the type of supervisory regime.Indeed, the choice of regulatory restrictions may be importantly influ-enced by the efficiency of supervision. We plan to explore these relation-ships in future research. The bottom line, however, is that this paper pres-ents new cross-country data and analyses of what a bank is and whetheror not it matters. For now it does indeed matter what a bank is permittedto do. The imposition of tight restrictions on some activities of banks ap-pears not to be beneficial and, worse yet, downright harmful in some im-portant ways.


Tabl

e2.

13S

umm

ary

ofE

mpi

rica

lRes

ults

Ban

kF

inan

cial

Con

cent

rati

on&

Indu

stri

alN

onba

nk&

Ban

kIn

effici

ency

Dev

elop

men

tB

ank

per

capi

taC

ompe

titi

onSt

ock

Mar

ket

Cri

sis

Secu

riti

esre

stri

ctio

nsSP

RSP

RIn

sura

nce

rest

rict

ions

Rea

lest

ate

rest

rict

ions

SPR

SNC

SNC

SPC

Ban

kow

ning

nonfi

nanc

ialfi

rms

rest

rict

ions

SPC

SNC

SPR

Non

finan

cial

firm

sow

ning

bank

sre

stri

ctio

nsSt

ate-

owne

dba

nkas

sets

SPC

SNC

SNR

Not

es:S

PC

indi

cate

sa

sign

ifica

ntpo

siti

veco

rrel

atio

n;SP

Rin

dica

tes

sign

ifica

ntpo

siti

vere

lati

onsh

ip,c

ontr

ollin

gfo

rG

DP

per

capi

taan

dgo

vern

men

tqua

lity;

SNC

indi

cate

sa

sign

ifica

ntne

gati

veco

rrel

atio

n;SN

Rin

dica

tes

asi

gnifi

cant

nega

tive

rela

tion

ship

,con

trol

ling

for

GD

Ppe

rca

pita

and

gove

rnm

ent

qual

ity.

Appendix A

Bank Regulations and the Socioeconomic Environment

This appendix presents correlations between the commercial bank regula-tory indicators and the degree of state ownership of banks and a varietyof political, cultural, legal, and economic characteristics. These socioeco-nomic factors may influence bank regulations and state ownership ofbanks. For instance, it has been found that income diversity and ethnicdiversity influence many policy decisions (see Engerman and Sokoloff1997 and Easterly and Levine 1997). Consequently, we examine the associ-ations between ethnic and income diversity and the commercial bank reg-ulatory decisions of governments. Furthermore, La Porta and colleagues(1998) emphasize that common law countries tend to provide greater pro-tection to outside investors in firms (creditors and minority shareholders).This may influence public demand for regulation. Thus, we examine therelationship between the legal environment and both regulatory regimeand state ownership of banks. Also, regulatory policies reflect the outcomeof political decisions. Thus, it is worth examining whether countries withgood public institutions tend to select particular financial sector policies.Lastly, we include the level of economic development. Not only is it worthexamining whether relatively successful countries tend to have particularregulatory/ownership patterns, but economic development may also behighly correlated with a variety of institutional and other national traitsthat are both associated with financial sector policies and for which we donot have direct measures. The goal here is to present some summary statis-tics regarding the relationship between the bank regulatory environmentand the socioeconomic environment more generally. More specifically, thesix indicators that we study are as follows:

1. Development: Real per capita GDP in 1980 (source: Penn WorldTables).

2. Good Government: Average value of three variables: (a) risk of expro-priation by the government, (b) the degree of corruption, and (c) the law-and-order tradition of the country. Each variable is based on a scale from0 to 10, where higher values signify better government (La Porta, Lopez-de-Silanes, and Shleifer 1999).

3. Income diversity: Average of Gini coefficients for each country overthe period 1980–95 (Deininger and Squire 1996).

4. Ethnic diversity: Average value of five indexes of ethnolinguistic frac-tionalization, with higher values denoting greater diversity. The scale ex-tends from 0 to 1 (Easterly and Levine 1997).

5. Common law country: Dummy variable with a value of 1 if the coun-



13. We calculate this from La Porta and colleagues (1998). Specifically, for shareholderrights, we add 1 if (1) the country allows the shareholders to mail their proxy to the firm; (2)shareholders are not required to deposit their shares prior to the General Shareholders’Meeting; (3) cumulative voting or proportional representation of minorities in the board ofdirectors is allowed; (4) an oppressed minorities mechanism is in place; (5) the minimumpercentage of share capital that entitles a shareholder to call for an Extraordinary Sharehold-ers’ Meeting is less than or equal to 10 percent (the sample median); or (6) shareholders havepreemptive rights that can only be waived by a shareholder’s vote. Then, we add 1 for creditorrights if (7) the country imposes restrictions, such as creditors’ consent, to file for reorganiza-tion; (8) secured creditors are able to gain possession of their security once the reorganizationpetition has been approved (no automatic stay); (9) secured creditors are ranked first in thedistribution of the proceeds that result from the disposition of assets of a bankrupt firm; and(10) the debtor does not retain the administration of its property pending the resolution ofthe reorganization. Thus, the legal rights of investors index can potentially assume valuesbetween 0 and 10.

try has an English, common law heritage, and 0 otherwise (La Porta,Lopez-de-Silanes, and Shleifer 1999).

6. Legal rights of investors: An index of the legal rights of creditors andminority shareholders (computed from La Porta, Lopez-de-Silanes, andShleifer 1998).13

Table 2A.1 presents simple correlations (and p-values for the correla-tions) between the regulatory/ownership indicators and the six indicatorsof the national environment. A few findings worth mentioning are as fol-lows. First, legal heritage and the legal rights of investors are not stronglyassociated with commercial banking regulations or state ownership ofbanks. Second, although ethnic diversity is not highly correlated with theregulatory/ownership environment, income diversity is strongly linked.Countries with greater income diversity tend to have more restrictions ontheir commercial banks with respect to (a) engaging in securities marketactivities and (b) owning nonfinancial firms. Third, governments in richercountries (and good governments—those with low corruption, a stronglaw-and-order tradition, and low risk of expropriation) tend to (a) imposefewer regulatory restrictions on their banks and (b) own a small percent-age of the banking industry. The level of economic development and thequality of the government are very highly correlated (0.82).

Tabl

e2A

.1C

orre

lati

ons

for

Ban

kR

egul

atio

nsan

dE

nvir

onm

ent

inw

hich

Ban

ksO

pera

te

Ban

ksO

wni

ngN

onfin

anci

alSt

ate-

Ow

ned

Rea

lN

onfin

anci

alF

irm

sO

wni

ngB

ank

Res

tric

tSe

curi

ties

Insu

ranc

eE

stat

eF

irm

sB

anks

Ass

ets

Dev

elop

men

t�

0.44

0�

0.11

0�

0.37

8�

0.45

0�

0.34

2�

0.05

0�

0.34

6(0

.000

)(0

.379

)(0

.002

)(0

.000

)(0

.005

)(0

.700

)(0

.005

)G

ood

Gov

ernm

ent

�0.

374

�0.

224

�0.

176

�0.

374

�0.

380

�0.

161

�0.

286

(0.0

03)

(0.0

83)

(0.1

74)

(0.0

04)

(0.0

03)

(0.2

30)

(0.0

30)

Inco

me

dive

rsit

y0.

347

0.39

60.

106

0.15

80.

371

0.19

50.

080

(0.0

10)

(0.0

03)

(0.4

47)

(0.2

55)

(0.0

06)

(0.1

71)

(0.5

71)

Eth

nic

dive

rsit

y0.

092

�0.

006

0.06

70.

134

0.04

80.

139

0.04

2(0

.464

)(0

.959

)(0

.592

)(0

.285

)(0

.707

)(0

.283

)(0

.744

)C

omm

onla

wco

untr

y�

0.06

0�

0.08

60.

093

�0.

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Table 2A.3 Banking Crises Around the Globe

Systemic Major Systemic Major

Argentina 1 1 Jordan 0 0Australia 0 0 Republic of Korea 1 1Austria 0 0 Lesotho 0 0Barbados 0 0 Luxembourg 0 0Belgium 0 0 Madagascar 1 1Bolivia 1 1 Malaysia 1 1Botswana 0 0 Malta 0 0Brazil 1 1 Mexico 1 1Canada 0 1 Netherlands 0 0Chile 1 1 New Zealand 0 0Colombia 1 1 Nigeria 1 1Cyprus 0 0 Norway 1 1Denmark 0 1 Pakistan 0 0Ecuador 1 1 Peru 1 1Egypt, Arab Rep. 1 1 The Philippines 1 1El Salvador 1 1 Portugal 0 0Fiji 0 0 Rwanda 0 0Finland 1 1 Seychelles 0 0France 0 0 Singapore 0 0The Gambia 0 0 South Africa 0 0Germany 0 0 Spain 0 0Ghana 1 1 Sri Lanka 1 1Greece 0 0 Suriname 0 0Guatemala 0 0 Sweden 1 1Guyana 0 0 Switzerland 0 0Hong Kong 0 1 Tanzania 1 1Iceland 0 0 Thailand 1 1India 0 1 Turkey 1 1Indonesia 1 1 United Kingdom 0 0Ireland 0 0 United States 0 1Israel 0 0 Uruguay 1 1Italy 0 1 Venezuela 1 1Japan 1 1 Zimbabwe 1 1


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Comment Mark Gertler

Overview

There are two parts to the paper: The first develops a data set that pro-vides cross-country measures of the stringency of legal restrictions on themix of banking and commerce and on bank ownership structure. The sec-ond part explores the extent to which these measures help explain (a) vari-


ous measures of financial development and real development and (b) fi-nancial crises. The most striking finding is that more restrictive ownershipstructures tend to raise the likelihood of a financial crisis.

Overall, I find the paper a very useful addition to the literature. The de-velopment of the data set is a particularly important contribution. The em-pirical results are thought provoking. I do think, however, that there aresome serious identification problems that make the findings hard to inter-pret. But I also believe that there may be ways to address this issue, as Idiscuss here.

The data are of three types:

1. Qualitative indicators of restrictions on the mix of banking and com-merce and on bank ownership structure. Specifically, each indicator is agrade of 1 to 4 for a variety of regulatory categories.

2. Quantitative measures of the degree of financial sophistication andreal development.

3. An indicator (unity or zero) of whether or not a country experienceda banking crisis, based on the Caprio and Klingebiel (1999) rating.

The overall empirical strategy of the paper is to consider the explanatorypower of variables in category 1 for variables in categories 2 and 3. Thefirst part of the paper considers regressions of variables in 2 on variablesin 1; the second considers regressions of variables in 3 on variables in 1.Following I discuss each part in turn. Because the results on financialcrises are the most striking and controversial, I spend most of the time onthe second part and only briefly touch on the first.

Part I: Does Regulatory Structure AffectFinancial or Real Development, or Both?

The authors’ answer is generally no. There appears to be little correla-tion between measures of regulatory tightness and financial development.In some ways this result is disappointing because it offers no clear guid-ance for regulatory reform—“try it; it can’t hurt” is not exactly a compel-ling argument for regulatory reform.

However, the lack of statistical significance could in part reflect the na-ture of the data in conjunction with the way the econometric model isspecified. As just discussed, the independent variables that measure legalrestrictions are qualitative indicators. It is accordingly difficult to measureintensity (e.g., is going from category 2 to 3 the same in percent terms asgoing from 3 to 4?). On the other hand, the authors impose a linear rela-tion in the estimation between the quantitative dependent variables andthe qualitative independent variables. To the extent that the restriction oflinearity is not correct (as is likely to be the case in general), low statisticalsignificance could result.

Another factor is that with the current data, the authors are unable to


control for the adequacy of supervision and regulation. Having legal re-strictions on the books is of little meaning if these restrictions cannot beenforced. In this regard, it would obviously be desirable to extend the dataset to include a measure of the quality of regulatory enforcement.

One positive finding is that a more restrictive regulatory structure im-plies a higher net interest margin. This result is consistent with the argu-ment that relaxing ownership restrictions could produce efficiency gains.Rather than reflect true efficiency gains, however, a high net interest mar-gin could simply reflect legal deposit rate ceilings, which force down thecost of liabilities. It could be the case that countries that heavily regulateownership structure are also more likely to restrict deposit rates. If thelatter scenario is true, then the evidence does not necessarily support re-laxing ownership structure. I believe, however, that there is sufficient dataon deposit rate restrictions to get to the bottom of the issue.

Part II: Does Regulatory Structure Affectthe Likelihood of Financial Crisis?

The authors’ answer is yes, very much so. Probit regressions yield statis-tically and quantitatively significant effects of regulatory structure on thelikelihood of a crisis for post-1980 data. The authors make a convincingcase, furthermore, that the results are not due to reverse causation. Thatis, by and large regulations were not imposed in the wake of a crisis.

The authors’ preferred explanation for the link between ownership re-strictions and financial crises is that limits on the diversification of activi-ties raised risk exposure. Although I do not necessarily disagree, note thatthis argument runs directly counter to the argument used to justify impos-ing the restrictions in the first place. The original justification for the now-defunct Glass-Steagall Act was that it would reduce risk taking by banks.Obviously, there are some theoretical issues to sort out here.

Overall, the results are impressive, but they raise a huge puzzle. In par-ticular, variables are found to predict financial crises that bear no obviousrelation to the factors emphasized in conventional descriptions of recentfinancial turmoil. Indeed, the entire discussion and formal analysis is or-thogonal to the standard literature. The conventional theories indeed makealmost no mention of ownership structure. They instead (e.g. Borio, Ken-nedy, and Prowse 1994) stress the following factors:

1. Financial liberalization, which leads to increased competition.2. Increased risk taking by financial institutions due to the first factor

along with failure by the regulatory authority to adjust the safety net toaccount for the change in competition and also along with weak supervi-sion and enforcement of existing regulations.

3. Macro shocks; for example, asset price contractions (real estate, ex-change rate, stock market, etc.) and associated recessions that have an


unduly harmful effect due to the increased risk taking by financial institu-tions.

Hutchinson and McDill (1999) provide formal support for the conven-tional theory, using a very similar methodology and, indeed, the exactsame dependent variable (the Caprio and Klingebiel [1999] measure offinancial crisis). In particular, they find that three factors contribute sig-nificantly to the likelihood of a crisis: (a) financial liberation; (b) explicitdeposit insurance protection; and (c) macroeconomic distress, as mea-sured by either real GDP growth or the change in real stock prices. Thiskind of empirical relation is exactly what the convention story suggests.

How do we reconcile the authors’ findings with those of Hutchinsonand McDill? The authors implicitly assume that the regulatory variablesthey include in their regressions are orthogonal to everything else thatmight affect the likelihood of a financial crisis, including the Hutchinsonand McDill variables. (The orthogonality assumption is required to justifythe coefficients on the regulatory variables as capturing the true effect ofthese variables on the likelihood of a crisis.)

There is, however, a clear geographic pattern to financial crises. In figure2C.1, the darkly shaded countries experienced a financial crisis; the lightlyshaded ones did not; and the countries not shaded do not appear in thesample. The crises are concentrated in four regions: Latin America, NorthAmerica, East Asia, and Scandinavia. Europe, for the most part, and Oce-ania (Australia and New Zealand) escaped formal banking crises.

Furthermore, in regions dominated by crises, it is unlikely that the coun-tries that escaped financial turmoil did so because they had fewer restric-tions on ownership. Table 2C.1 lists the countries by region, along with theauthors’ measure of the stringency of ownership restrictions. It is clear, forexample, that the countries in Latin America, East Asia, and Scandinaviathat did not have crises also did not have restrictions significantly weakerthan the norm for the region.

It is true, though, that the regions that largely escaped crises (Europeand Oceania) did have less restrictive systems. In other words, there is acorrelation between geography and the nature of the financial system,which reconciles the authors’ findings with the clear regional pattern infigure 2C.1. On the other hand, there is an identification problem becausegeography might be correlated with other relevant factors. For example,Europe and Oceania may simply have suffered less severe aggregate shocksthan the other regions.

Evidence from Higgens and Osler (1997), however, suggests that thesimple asymmetric shock hypothesis may not be correct. In particular, Eu-rope and Australia did experience asset price contractions similar in mag-nitude. Thus, there is some reason to believe that the banking systems inthese countries were more resilient than those in the regions experiencing


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crises. On the other hand, this alone does not prove the authors’ theory,which stresses that alternative lines of business helped smooth banks’ cashflow. For example, it might have been the case that banks in these regionswere simply less exposed to real estate risk. Fortunately, the data exist tosort out these competing hypotheses.

In addition to sorting out these competing stories, it would be worth-while to integrate the formal panel data analysis with other studies onfinancial crises (e.g., Hutchinson and McDill 1999). For example, it mightbe worthwhile to interact the authors’ regulatory variables with other fac-tors that appear to cause crises (e.g., liberalization and macroshocks). Ata minimum, there should be regional dummies, as figure 2C.1 makes clear.

References

Borio, C. E. V., N. Kennedy, and S. D. Prowse. 1994. Exploring aggregate assetprice fluctuations across countries: Measurement, determinants, and monetarypolicy implications. BIS Economics Papers no. 40. Bank for International Settle-ments, April.

Caprio, G., Jr., and D. Klingebiel. 1999. Episodes of systemic and borderline fi-nancial crises. Washington, D.C.: World Bank. Mimeograph.

Higgens, M., and C. Osler. 1997. Asset market hangover and economic growth:The OECD during 1984–93. Oxford Review of Economic Policy 13 (3): 110–134.

Hutchinson, M., and K. McDill. 1999. Are all banking crises alike? The Japaneseexperience in international comparison. NBER Working Paper no. 7253. Cam-bridge, Mass.: National Bureau of Economic Research.

Discussion Summary

Charles Calomiris began the general discussion by raising an empiricalquestion about business-bank linkages. He noted that the regulatory envi-ronment is not fully captured by laws that prevent ownership of banks byfirms and vice versa. He argued that in some of the crisis countries, insiderlending is high because of concentration in the industrial sector that has aclaim on bank lending resources. He wondered if another variable mightnot be appropriate—an interaction between industrial concentration andinsider lending. He concluded by noting that ownership variables used inthe paper do not fully capture the regulatory environment.

Raghuram Rajan began by asking about the role of changes in regulationand ownership to complement the cross-sectional evidence presented inthe regressions. He asked whether the authors had examples of changesin regulation and ownership where the regulation is getting tighter. MarkFlannery asked about the role of foreign banks. He noted that in Singa-pore, for example, significant banking assets are held in foreign bank


branches instead of domestic institutions. He suggested that the authorslook at restraints on real estate holdings as well. He also wondered aboutthe endogeneity of the regulatory structure.

Andrew Powell raised the issue of entrance by foreign banks. He won-dered if the entrance of foreign banks could be correlated with the restric-tions. Martin Feldstein also questioned the role of foreign banks—in par-ticular the scope and size of their activities.

Eric Rosengren raised the question of whether one regulatory structureshould fit all. He noted that restrictions might be optimal in a volatileeconomic environment, and that in such an environment banks might notbe able to act effectively as intermediaries. He observed that in a stableenvironment, a different and less-restrictive environment might be better.He noted that the regulatory environment might, in fact, be endogenousto the macroeconomic environment.

Following up on comments made by the discussant Mark Gertler, Ste-phen Cecchetti emphasized the role of deposit insurance. He noted thatthe authors could try to exploit any information that is available on boththe amount and changes of deposit insurance coverage.

Gerard Caprio began by responding to Rosengren and agreeing that onesize does not fit all. He noted that if the world is changing or internationalagencies are pushing in that direction, this could be a mistake. In responseto Rajan, Caprio observed that most countries have moved in the otherdirection, going from restrictive rules to looser rules. Fewer data are avail-able for those countries, however.

James Barth also replied, noting that evidence on foreign ownershipneeds to distinguish wholesale from retail operations. Foreign ownershipmay also be correlated with government ownership. He also noted that, inpart, the wealth variable captures family involvement. He also noted thatalong the same lines it would be helpful to look at government-directedlending.

Finally, Ross Levine noted that additional research on deposit insuranceis currently underway (in particular, at a large World Bank research proj-ect). He observed that the inclusion of the deposit insurance variable avail-able does not seem to affect the paper’s findings. He also observed that, asexpected, there is an increase in the probability of a crisis with more andexplicit deposit insurance. Finally, he noted that data for foreign bankownership and the regulation of foreign participation have also been in-cluded and that these variables do not seem to affect the ownership orsecurities results presented.


banking systems around the globe: do regulation and ownership

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