List of Figures, Tables, and Appendices page ix
Preface xiii
1. Introduction 1
1.A. Motivation 1
1.B. Objectives and Contributions 3
1.C. Key Findings: A Brief Synopsis 10
1.D. Guide to the Book 16
2. Contrasting Approaches to Bank Regulation 18
2.A. Two Approaches to Bank Regulation 21
2.B. Bank Regulation: Pros and Cons 46
2.C. The Basel Committee and Regulatory Convergence 63
2.D. Conclusion 74
3. How Are Banks Regulated and Supervised Around theWorld? 75
3.A. Overview 75
3.B. Structure, Scope, and Independence of Regulation and
Supervision 83
3.C. What Is a “Bank”? 102
3.D. Entry into Banking, Capital Requirements, and
Supervisory Powers 110
3.E. Explicit Deposit Insurance Schemes 132
3.F. Private Monitoring and External Governance 136
3.G. Does Bank Ownership Type Affect the Choice of
Regulations and Supervisory Practices? 148
3.H. Forces for Greater Harmonization of Regulation and
Supervision among Countries 161
vii
viii Contents
4. WhatWorks Best? 178
4.A. Goals and Boundaries 178
4.B. Bank Regulation and Supervision and Bank
Development 185
4.C. Bank Supervision, Regulation, and Stability 213
4.D. Bank Supervision, Regulation, and Bank Efficiency 224
4.E. Bank Supervision, Regulation, and Bank Lending 235
4.F. Supervision, Regulation, and Bank Governance 245
4.G. Summary of Results 252
5. Choosing Bank Regulations 258
5.A. Recap and Motivation 258
5.B. Motivating Example: Mexico and the United States 262
5.C. Conceptual Framework 270
5.D. Empirical Framework and Data 286
5.E. Summary Remarks 306
6. Rethinking Bank Regulation 307
6.A. Approach and Context 307
6.B. Lessons and Implications 309
Appendices 317
References 379
Index 405
Figures, Tables, and Appendices
figures
1.1 Framework for Bank Regulation page 6
2.1 Claims on Government/Total Bank Deposits 40
3.1 Countries Participating in the World Bank Surveys 77
3.2 Regulatory Restrictions on Bank Activities by Degree of
Restrictiveness 105
3.3 Regulatory Restrictions on Financial Conglomerates by
Degree of Restrictiveness 108
3.4 Complexity of Financial Conglomerates 109
3.5 Denial of Entry Applications: Differences Across
Countries 114
3.6 Minimum Risk-Based Capital Requirements Across
Countries 117
3.7 Minimum Capital Regulatory Requirements: Differences
Across Countries 118
3.8 Actual Risk-Adjusted Capital Ratio 119
3.9 Overall Capital Stringency 120
3.10 Initial Sources of Funds for Regulatory Capital:
Differences Across Countries 121
3.11 Official Supervisory Power Components: Differences
Across Countries 123
3.12 Supervisory Forbearance Discretion: Differences Across
Countries 125
3.13 Court Involvement in Banking Issues: Differences
Across Countries 128
ix
x Figures, Tables, and Appendices
3.14 Encouragement or Restrictions on Bank Diversification:
Differences Across Countries 131
3.15 Percentage of Countries with an Explicit Deposit
Insurance Scheme 133
3.16 Percentage of Total Assets Funded with Insured Deposits 135
3.17 Banks Rated by Credit Rating Agencies 138
3.18 Strength of External Audit: Differences Across Countries 145
3.19 Financial Statement Transparency: Differences Across
Countries 147
3.20 Distribution of Countries by Predominant Type of Bank
Ownership 155
3.21 Bank Ownership Type, Supervisory Independence, and
Deposit Insurance 158
3.22 Bank Ownership Type and Degree of Restrictiveness 159
3.23 Bank Ownership Type and Credit Ratings 159
3.24 Bank Ownership Type and Governance 160
3.25 Bank Ownership Type, Monitoring, and Capital
Requirements 160
3.26 Offshore Financial Centers, Regulations, and
Supervisory Practices 176
3.27 Offshore Financial Centers, Regulations, and
Supervisory Practices 176
4.1 Bank Development and the Exogenous Component of
Private Monitoring 199
4.2 Bank Development and the Exogenous Component of
Private Monitoring, Outliers Removed 200
4.3 Bank Development and the Exogenous Component of
Official Supervisory Power 202
4.4 Bank Development and the Exogenous Component of
Official Supervisory Power, Outliers Removed 203
4.5 Bank Development and the Exogenous Component of
Capital Regulatory Index 207
4.6 Bank Development and the Exogenous Component of
Capital Regulatory Index, Outliers Removed 208
4.7 Bank Development and the Exogenous Component of
Activities Restrictions 210
4.8 Bank Development and the Exogenous Component of
Activities Restrictions, Outliers Removed 211
5.1 Private Monitoring and Executive Constraints 302
5.2 Private Monitoring and Voice & Accountability 303
Figures, Tables, and Appendices xi
tables
3.1 World Bank Survey – Countries Classified by Income
and Region 78
3.2 Countries with Single vs. Multiple Bank Supervisory
Authorities 86
3.3 Countries with the Central Bank as a Supervisor
Authority 90
3.4 Scope of Supervisory Authority 94
3.5 Degree of Supervisory Independence 100
3.6 Common Requirements for a Banking License:
Countries Responding “No” by Requirement 112
3.7 Court Involvement 129
3.8 Countries Prohibiting Banks from Making Loans
Abroad 132
3.9 Bank Accounting Practices: An International
Comparison 143
3.10 Percentage of Bank Assets at Government-Owned Banks 149
3.11 Government Ownership Share of Assets in Surveys 150
3.12 Percentage of Bank Assets at Foreign-Owned Banks 152
3.13 Foreign Ownership Share of Assets in Surveys 153
3.14 Percentage of Bank Assets at Privately Owned Banks 154
3.15 Distribution of Countries by Predominant Type of Bank
Ownership and by Income Level 156
3.16 Examples of Market Access and National Treatment
Limitations 170
4.1 Bank Supervision: Correlations 187
4.2 Part A: Bank Development and Supervision: Controlling
for Endogeneity 196
4.2 Part B: Bank Development and Supervision: Controlling
for Endogeneity 197
4.3 Bank Development and Supervision – Multivariate
Analysis 198
4.4 Bank Development and Supervision with Interaction
Terms 205
4.5 Banking Crises Regressions 215
4.6 Banking Crises Regressions 218
4.7 Net Interest Margin and Supervision 230
4.8 Overhead Costs and Supervision 232
4.9 Corruption and Lending 242
xii Figures, Tables, and Appendices
5.1 Political System Determinants of Banking Policies:
Executive Constraints 298
5.2 Political System Determinants of Banking Policies:
Executive Openness 299
5.3 Political System Determinants of Banking Policies:
Executive Competition 300
5.4 Political System Determinants of Banking Policies: Voice
& Accountability 301
appendices
1. Guide to the 2003World Bank Survey 319
2. Quantification of Different Dimensions of Bank
Regulation and Supervision 331
3. Key International Standards for Sound Financial Systems 358
4. Core Principles for Effective Banking Supervision 359
5. Information on Different Dimensions of Bank
Regulation and Supervision: Averages by Income Level
and Development Status 361
6. Information on Different Dimensions of Bank
Regulation and Supervision: Averages by Region 365
7. Information on Different Dimensions of Bank
Regulation and Supervision: Averages by Economic and
Currency Unions Status 370
8. Information on Different Dimensions of Bank
Regulation and Supervision: Averages by OECD, WTO,
and Offshore Status 374
9. Country Names and Country Codes 378