An International Comparison and Assessment of the Structure of Bank Supervision

Abstract

Countries around the world, at every stage of economic development, have experienced banking crises or significant systemic banking problems over the past two decades. In addition, these countries, and even countries not experiencing crises or systemic problems, have been affected by significant changes in their banking structures. Under these circumstances, policy makers and industry participants alike have raised important questions about the appropriate role, structure, and regulation and supervision of the banking industry.

An emerging literature describes the extent to which bank structure, powers, and deposit insurance schemes vary across countries, and an increasing number of studies use cross-country data to identify fundamental factors affecting banking industry performance, financial stability, and impact on economic development. This work is helping shape policy prescriptions for dealing with and preventing banking and financial crises, and for restructuring banking and financial systems. Nevertheless, gaps remain in the analysis. One key issue, on which the current study focuses, is the role and impact of the supervisory structure of the banking industry. Drawing upon a database that includes banking data for over 100 countries, our analysis proceeds in two stages. There has been relatively little analysis of banking supervision across such a wide range of countries, and so in the first stage, which describes key features of the international banking landscape, we highlight cross-country similarities and differences in the structure of banking supervision. By this we mean the extent to which countries rely on a single, or multiple, supervisory authorities, as well as the role the central bank plays in bank supervision. The second phase of our analysis uses difference of means tests to hone in on whether or not significant relationships exist between banking supervision on the one hand, and key aspects of banking system structure, performance, and the range of activities in which banks are permitted to engage on the other.

We find that there are several key correlations between banking industry structure and powers, and whether the central bank is a banking supervisor or not. In general, banking systems with relatively small banks, large government ownership in banking, and relatively high entry barriers are also those systems more likely to have the central bank as a banking supervisory authority. In addition, central bank-as-supervisor systems tend to be more restrictive in the range of activities allowed to their banks. They also rely less on market discipline, but also less heavily on having an explicit deposit insurance scheme. We could, however, find no correlation between the number of banking supervisory authorities (i.e., a single- or a multiple-supervisor system) and any of the key attributes of banking systems we investigated. That fact could imply that it is less urgent than some have thought for policy makers to grapple with the issue of single versus multiple banking supervisory authorities. Before drawing conclusions more firmly however, we advocate further research to investigate causal links between bank supervisory structure and banking industry structure and performance.

Keywords: bank supervision, international banking, cross-country comparisons of banking

JEL Classification: G2, G21, G28