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Do bank regulation and supervision matter?

Author

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  • Kangbok Lee
  • Wenling Lu

Abstract

Purpose - – The purpose of this paper is to examine the impact of bank regulation and supervision on bank development, efficiency and fragility over the period of 1999-2011. Design/methodology/approach - – The authors’ approach is based on a multivariate difference-in-difference model which controls for potential endogeneity of the explanatory variables and unobservable country-specific effect. The paper investigates the changes of bank outcomes and a country’s regulation and supervisory practices, in terms of capital regulation, supervisory power, private monitoring, entry into banking requirements, overall restrictions on bank activities and government ownership of banks in a sample of 53 countries with a total of 482 observations. Findings - – Empirical results indicate that greater capital regulatory requirements reduce bank fragility, as measured by lower levels of non-performing loans but reduce bank efficiency, as measured by higher levels of net interest margin; supervisory practices that strengthen private sector monitoring of banks improve bank development, as measured by bank private credit as a share of gross domestic product; lower levels of non-performing loans are associated with greater enter-into-banking requirements and less restrictiveness on bank activities; and greater government ownership of banks is associated with both higher levels of net interest margin and higher levels of non-performing loans. Overall, the findings support Basel II’s first and third pillars: capital requirements and private monitoring. Originality/value - – This cross-country analysis provides evidence on which specific regulatory and supervisory practices work best in light of what was learned from the recent financial crisis.

Suggested Citation

  • Kangbok Lee & Wenling Lu, 2015. "Do bank regulation and supervision matter?," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 7(3), pages 275-288, August.
  • Handle: RePEc:eme:jfeppp:v:7:y:2015:i:3:p:275-288
    DOI: 10.1108/JFEP-03-2015-0019
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    Citations

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    Cited by:

    1. Clément Mathonnat & Alexandru Minea & Marcel Voia, 2022. "Does more finance lead to longer crises?," The World Economy, Wiley Blackwell, vol. 45(1), pages 111-135, January.
    2. Zhang, Dongyang, 2020. "Do credit squeezes influence firm survival? An empirical investigation of China," Economic Systems, Elsevier, vol. 44(3).
    3. Meier, Samira & Rodriguez Gonzalez, Miguel & Kunze, Frederik, 2021. "The global financial crisis, the EMU sovereign debt crisis and international financial regulation: lessons from a systematic literature review," International Review of Law and Economics, Elsevier, vol. 65(C).

    More about this item

    Keywords

    Financial crisis; Financial institutions; Regulation and supervision; G38; G21; G28;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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