Bank Regulation Is Changing: But for Better or Worse?

1. Bank Regulation Is Changing: But for Better or Worse? Authors: James R. Barth Gerard Caprio, Jr. Ross Levine Presented by LevanBzhalava

2. Do changes in bank regulation contributing positively to financial sector development?

3. Introduction • Subsequent changes have taken place in the regulatory environment since the late 1990s. • Some countries have reformed their regulations to empower private monitoring, others did opposite.

4. Data • 3 Surveys • 1st: 1998-99-2000 • 117 countries • 180 questions • 2nd: 2003 • 152 countries • 275 questions • 3rd: 2006 • 142 countries • 300+ questions

5. Survey questions • Entry into banking • Ownership • Capital • Activities • External auditing requirements • Internal management/organizational requirements • Liquidity and diversification requirements • Depositor (savings) protection schemes • Provisioning requirements • Accounting/information disclosure requirements • Discipline/problem institutions/exit, and • Supervision. The majority of questions are structured to be in a yes/no format. Simple and precise questions increase the response rate

6. Bank regulation around the world • Response to crises: Mexico - easing restrictions on banks. Argentina -tightened restrictions and policies , withdraw foreign banks • Most other crisis countries also moved in the direction of greater restrictions. • U.S.A - dismantling barriers, separating commercial banking, investment banking, and insurance.

7. Supervision around the World • Official supervisory power lowers bank development. In countries with a weak institutional environment, it was associated with increased corruption in the lending process • Private monitoring boosts bank development

8. Regression • Logit; • Cross-country OLS; • Cross-Bank OLS

9. Equations Y = α + βX Y - either bank development, the net interest margin, or overhead costs X - matrix of explanatory variables from Survey Logit (P) = α + βX P - probability that the country suffers a systemic crisis (or the probability that a firm responds that corrupt bank officials are an impediment to its growth). X - matrix of explanatory variables from Survey

18. Conclusion • Official supervisory power reduce bank development, increase corruption • Look to why supervisory has not been working • Restrictions on bank activities are bad • Focus on markets needs, improve infrastructure, incentives to use it • Diversification of bank activities is important

19. “Policies may work differently in different political and institutional regimes” Gerard Caprio, Williams College

20. Supplementary sources • James R. Barth, Gerard Caprio, Jr. and Ross Levine (2002) “Bank Regulation and Supervision: What Works Best,” www.bis.org/bcbs/events/b2ealev.pdf • Thorsten Beck, Aslı Demirgüç-Kunt, and Ross Levine (2005) “Bank Supervision and Corruption in Lending,” Journal of Monetary Economics 53, 2131-2163 www.econ.brown.edu/fac/Ross_Levine/Publication/Forthcoming/Forth_3RL_Supervision%20Corruption%20Lending.pdf • Gerard Caprio, Williams College “Bank Regulation Is Changing: But for Better or Worse?” www.hnb.hr/dub-konf/13-konferencija/caprio-college prezentacija.ppt?tsfsg=1817391646f8e9538cc7fbeaa2c53f48 • Photos sources: http://www.123rf.com/ ; Stock Photography and Stock Footage www.fotosearch.com/comstock/small-business/CSK198/ - 116k