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Do bank regulation and supervision matter? International evidence from the recent financial crisis

Kangbok Lee (Aviation & Supply Chain Management, Auburn University, Auburn, AL, USA)
Wenling Lu (Finance & Commercial Law, Western Michigan University, Kalamazoo, MI, USA)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 3 August 2015

1078

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.

Keywords

Acknowledgements

The authors thank David Whidbee, Gene Lai, George Jiang and Que-Giang Tran-Thi for their helpful comments and suggestions.

Citation

Lee, K. and Lu, W. (2015), "Do bank regulation and supervision matter? International evidence from the recent financial crisis", Journal of Financial Economic Policy, Vol. 7 No. 3, pp. 275-288. https://doi.org/10.1108/JFEP-03-2015-0019

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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