Banking on the Principles: Compliance with Basel Core Principles and Bank Soundness

35 Pages Posted: 13 Nov 2006

See all articles by Thierry Tressel

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Enrica Detragiache

International Monetary Fund (IMF) - European Department

Asli Demirgüç-Kunt

World Bank - Development Research Group; World Bank

Multiple version iconThere are 2 versions of this paper

Date Written: October 2006

Abstract

This paper studies whether compliance with the Basel Core Principles for Effective Banking Supervision (BCPs) improves bank soundness. The authors find a significant and positive relationship between bank soundness (measured with Moody's financial strength ratings) and compliance with principles related to information provision. Specifically, countries that require banks to regularly and accurately report their financial data to regulators and market participants have sounder banks. This relationship is robust to controlling for broad indexes of institutional quality, macroeconomic variables, sovereign ratings, and reverse causality. Measuring soundness through Z-scores yields similar results. These findings emphasize the importance of transparency in making supervisory processes effective and strengthening market discipline. Countries aiming to upgrade banking regulation and supervision should consider giving priority to information provision over other elements of the core principles.

JEL Classification: G21, G28

Suggested Citation

Tressel, Thierry and Detragiache, Enrica and Demirgüç-Kunt, Asli, Banking on the Principles: Compliance with Basel Core Principles and Bank Soundness (October 2006). IMF Working Paper No. 06/242. Available at SSRN: https://ssrn.com/abstract=944080

Thierry Tressel (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Enrica Detragiache

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Asli Demirgüç-Kunt

World Bank - Development Research Group ( email )

United States
202-473-7479 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/ademirguckunt/

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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