Publication: Bank Regulation and Supervision : What Works Best?
Date
2001-11
ISSN
Published
2001-11
Author(s)
Barth, James R.
Caprio, Gerard, Jr.
Levine, Ross
Abstract
The authors draw on their new database
on bank regulation and supervision in 107 countries to
assess different governmental approaches to bank regulation
and supervision and evaluate the efficacy of different
regulatory and supervisory policies. First, the authors
assess two broad and competing theories of government
regulation: the helping-hand approach, according to which
governments regulate to correct market failures, and the
grabbing-hand approach, according to which governments
regulate to support political constituencies. Second, they
assess the effect of an extensive array of regulatory and
supervisory policies on the development and fragility of the
banking sector. These policies include the following:
Regulations on bank activities and the mixing of banking and
commerce. Regulations on entry by domestic and foreign
banks. Regulations on capital adequacy. Design features of
deposit insurance systems. Supervisory power, independence,
and resources; stringency of loan classification;
provisioning standards; diversification guidelines; and
powers to take prompt corrective action. Regulations
governing information disclosure and fostering private
sector monitoring of banks. Government ownership of banks.
The results raise a cautionary flag with regard to reform
strategies that place excessive reliance on a country's
adherence to an extensive checklist of regulatory and
supervisory practices that involve direct government
oversight of and restrictions on banks. The findings, which
are much more consistent with the grabbing-hand view of
regulation than with the helping-hand view, suggest that the
regulatory and supervisory practices most effective in
promoting good performance and stability in the banking
sector are those that force accurate information disclosure,
empower private sector monitoring of banks, and foster
incentives for private agents to exert corporate control.
Citation
“Barth, James R.; Caprio, Gerard, Jr.; Levine, Ross. 2001. Bank Regulation and Supervision : What Works Best?. Policy Research Working Paper;No. 2725. © World Bank, Washington, DC. http://hdl.handle.net/10986/19419 License: CC BY 3.0 IGO.”
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