Institutional Setup and Banking Regulation: Evidence From Panel Data

Abstract

In this paper, we study the effects of different institutional setups on banking regulation and supervision. In-depth econometric analyses are carried out on panel data over the period 1975- 2005 on a large sample and account for the unobserved country-specific effects as well as time effects. Our results suggest strong evidence that both domestic and international institutions are significantly associated with banking regulation and supervision, though with differing impacts. Our analyses also show that democratic institutions negatively affect banking regulation, a result that suggests that such institutions might have a detrimental effect on the process of implementing effective banking supervision. Lastly, our results point to what can be called the “institutional paradox” of banking regulation and supervision in developed countries. These results emerge in both fixed-effects estimators and generalized method of moments (GMM) and are robust across different aspects of banking supervision.

Keywords: Institutions, Banking regulation, Financial stability.

JEL Classification: G21, G28