Financial Regulation and Performance: Cross-Country Evidence

37 Pages Posted: 20 Apr 2016

See all articles by James R. Barth

James R. Barth

Auburn University; Milken Institute

Gerard Caprio

Williams College

Ross Levine

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Date Written: November 1998

Abstract

Those who believe stricter restrictions on allowable bank activities will limit risk-taking behavior may be surprised to learn that in countries where bank activities are restricted, the likelihood of a banking crisis may be greater.

Costly bank failures in the past two decades have focused attention on the need to find ways to improve the performance of different countries' financial systems. Belief is overwhelming that financial systems can be improved but there is little empirical evidence to support any specific advice about regulatory and supervisory reform. With scant cross-country comparisons of financial regulatory and supervisory systems, economists cannot decide how to correct incentives and moral hazard problems in developing economies - whether, for example, to require higher (and more narrowly defined) capital-to-asset ratios, to mandate stricter definition and disclosure of nonperforming loans, to require that subordinated debt be issued, or to install world-class supervision. Proposed reforms usually involve changes in financial regulations and supervisory standards, but many pressing questions about reform remain unanswered.

Making use of a new database, Barth, Caprio, and Levine come up with brief answers to three key questions:

- Do countries with relatively weak governments and bureaucratic systems impose harsher regulatory restrictions on bank activities? Yes. - Do countries with more restrictive regulatory regimes have poorly functioning banking systems. No- or at least the evidence is mixed. - Do countries with more restrictive regulatory systems have less probability of suffering a banking crisis? No. In fact, the reverse is true. In countries where banks` securities activities are restricted, the likelihood of a banking crisis is greater, other things being equal.

This paper - a product of Finance, Development Research Group-is part of a larger effort in the group to study the effect of financial regulation and supervision.

Suggested Citation

Barth, James R. and Caprio, Gerard and Levine, Ross Eric, Financial Regulation and Performance: Cross-Country Evidence (November 1998). World Bank Policy Research Working Paper No. 2037. Available at SSRN: https://ssrn.com/abstract=569208

James R. Barth

Auburn University ( email )

415 West Magnolia Avenue
Auburn, AL 36849
United States
334-844-2469 (Phone)
334-844-4960 (Fax)

Milken Institute ( email )

1250 Fourth Street
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Gerard Caprio

Williams College ( email )

Williamstown, MA 01267
United States
413-597-2465 (Phone)
413-597-4045 (Fax)

Ross Eric Levine

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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