A Structural Approach to Financial Stability: On the Beneficial Role of Regulatory Governance
32 Pages Posted: 9 Oct 2013
Date Written: January 1, 2013
This paper examines whether the governance of regulatory agencies – regulatory governance – is positively related to financial sector soundness. We model regulatory governance and financial stability as latent variables, using a structural equation modeling approach. We include a broad range of variables potentially relevant to financial stability, employing aggregate regulatory, banking and financial, macroeconomic and institutional environment data for a sample of 55 countries over a period from 2001 to 2005. Given the growing importance of macro-prudential analysis, we use the IMF’s financial soundness indicators, a relatively new body of economic statistics which focuses on the banking sector as a whole. Our empirical evidence indicates that regulatory governance has a beneficial influence on financial stability. Thus, our findings support the view that the improvement of regulatory governance arrangements should be a building block of financial reform.
Keywords: banking regulation, governance, financial stability, macro-prudential analysis, structural equation modeling
JEL Classification: G21, G28
Suggested Citation: Suggested Citation