Showing papers by "James R. Barth published in 2001"

Bank Regulation and Supervision: What Works Best?

Abstract: The authors draw on their new database on bank regulation and supervision in 107 countries to assess different governmental approaches to bank regulation and supervision and evaluate the efficacy of different regulatory and supervisory policies. First, the authors assess two broad and competing theories of government regulation: the helping-hand approach, according to which governments regulate to correct market failures, and the grabbing-hand approach, according to which governments regulate to support political constituencies. Second, they assess the effect of an extensive array of regulatory and supervisory policies on the development and fragility of the banking sector. These policies include the following: Regulations on bank activities and the mixing of banking and commerce. Regulations on entry by domestic and foreign banks. Regulations on capital adequacy. Design features of deposit insurance systems. Supervisory power, independence, and resources; stringency of loan classification; provisioning standards; diversification guidelines; and powers to take prompt corrective action. Regulations governing information disclosure and fostering private sector monitoring of banks. Government ownership of banks. The results raise a cautionary flag with regard to reform strategies that place excessive reliance on a country's adherence to an extensive checklist of regulatory and supervisory practices that involve direct government oversight of and restrictions on banks. The findings, which are much more consistent with the grabbing-hand view of regulation than with the helping-hand view, suggest that the regulatory and supervisory practices most effective in promoting good performance and stability in the banking sector are those that force accurate information disclosure, empower private sector monitoring of banks, and foster incentives for private agents to exert corporate control.

The Regulation and Supervision of Banks Around the World: A New Database

Abstract: This new and comprehensive database on the regulation and supervision of banks in 107 countries should better inform advice about bank regulation and supervision and lower the marginal cost of empirical research.International consultants on bank regulation and supervision for developing countries often base their advice on how their home country does things, for lack of information on practice in other countries. Recommendations for reform have tended to be shaped by bias rather than facts.To better inform advice about bank regulation and supervision and to lower the marginal cost of empirical research, Barth, Caprio, and Levine present and discuss a new and comprehensive database on the regulation and supervision of banks in 107 countries. The data, based on surveys sent to national bank regulatory and supervisory authorities, are now available to researchers and policymakers around the world.The data cover such aspects of banking as entry requirements, ownership restrictions, capital requirements, activity restrictions, external auditing requirements, characteristics of deposit insurance schemes, loan classification and provisioning requirements, accounting and disclosure requirements, troubled bank resolution actions, and (uniquely) the quality of supervisory personnel and their actions.The database permits users to learn how banks are currently regulated and supervised, and about bank structures and deposit insurance schemes, for a broad cross-section of countries.In addition to describing the data, Barth, Caprio, and Levine show how variables may be grouped and aggregated. They also show some simple correlations among selected variables.In a companion paper ("Bank Regulation and Supervision: What Works Best") studying the relationship between differences in bank regulation and supervision and bank performance and stability, they conclude that:- Countries with policies that promote private monitoring of banks have better bank performance and more stability. Countries with more generous deposit insurance schemes tend to have poorer bank performance and more bank fragility.- Diversification of income streams and loan portfolios - by not restricting bank activities - also tends to improve performance and stability. (This works best when an active securities market exists.) Countries in which banks are encouraged to diversify their portfolios domestically and internationally suffer fewer crises.This paper - a product of Finance, Development Research Group, and the Financial Sector Strategy and Policy Department - is part of a larger effort in the Bank to compile data on financial regulation and supervision and the advise countries on what works best. The study was funded by the Bank's Research Support Budget under the research project "Bank Regulation and Supervision: What Works and What Does Not."

Banking Systems around the Globe: Do Regulation and Ownership Affect Performance and Stability?

Abstract: The authors report cross-country data on commercial bank regulation and ownership in more than 60 countries. They evaluate the links between different regulatory/ownership practices in those countries and both financial sector performance and banking system stability. They document substantial variation in response to these questions: Should it be public policy to limit the powers of commercial banks to engage in securities, insurance, and real estate activities? Should the mixing of banking and commerce be restricted by regulating commercial bank's ownership of non-financial firms and non-financial firms'ownership of commercial banks? Should states own commercial banks, or should those banks be privatized? They find: 1) There is no reliable statistical relationship between restrictions on commercial banks'ability to engage in securities, insurance, and real estate transactions and how well-developed the banking sector, how well-developed securities markets and non-bank financial intermediaries are, or the degree of industrial competition. Based on the evidence, it is difficult to argue confidently that restricting commercial banking activities benefits-or harms-the development of financial and securities markets or industrial competition. 2) There are no positive effects from mixing banking and commerce. 3) Countries that more tightly restrict and regulate the securities activities of commercial banks are substantially more likely to suffer a major banking crisis. Countries whose national regulations inhibit banks'ability to engage in securities underwriting, brokering, and dealing--and all aspects of the mutual fund business--tend to have more fragile financial systems. 4) The mixing of banking and commerce is associated with less financial stability. The evidence does not support admonitions to restrict the mixing of banking and commerce because mixing them will increase financial fragility. 5) On average, greater state ownership of banks tends to be associated w (This abstract was borrowed from another version of this item.)

Bank Regulation and Supervision: What Works Best?

Abstract: The regulatory and supervisory practices most effective in promoting good performance and stability in the banking sector are those that force accurate information disclosure, empower private sector monitoring of banks, and foster incentives for private agents to exert corporate control. Barth, Caprio, and Levine draw on their new database on bank regulation and supervision in 107 countries to assess different governmental approaches to bank regulation and supervision and evaluate the efficacy of different regulatory and supervisory policies. First, the authors assess two broad and competing theories of government regulation: the helping-hand approach, according to which governments regulate to correct market failures, and the grabbing-hand approach, according to which governments regulate to support political constituencies. Second, they assess the effect of an extensive array of regulatory and supervisory policies on the development and fragility of the banking sector. These policies include the following: - Regulations on bank activities and the mixing of banking and commerce. - Regulations on entry by domestic and foreign banks. - Regulations on capital adequacy. - Design features of deposit insurance systems. - Supervisory power, independence, and resources; stringency of loan classification; provisioning standards; diversification guidelines; and powers to take prompt corrective action. - Regulations governing information disclosure and fostering private sector monitoring of banks. - Government ownership of banks. The results raise a cautionary flag with regard to reform strategies that place excessive reliance on a country's adherence to an extensive checklist of regulatory and supervisory practices that involve direct government oversight of and restrictions on banks. The findings, which are much more consistent with the grabbing-hand view of regulation than with the helping-hand view, suggest that the regulatory and supervisory practices most effective in promoting good performance and stability in the banking sector are those that force accurate information disclosure, empower private sector monitoring of banks, and foster incentives for private agents to exert corporate control. This paper - a joint product of Finance, Development Research Group, and the Financial Sector Strategy and Policy Department - is part of a larger effort in the Bank to analyze the effect of financial sector regulation on development. The authors may be contacted at jbarth@business.auburn.edu, gcaprio@worldbank.org, or rlevine@csom.umn.edu.

An International Comparison and Assessment of the Structure of Bank Supervision

Abstract: International Review of Finance, 3:3/4, 2002: pp. 163±188 Bank Safety and Soundness and the Structure of Bank Supervision: A Cross-Country Analysis* y J AMES R. B ARTH y , L UIS G. D OPICO z , D ANIEL E. N OLLE § AND J AMES A. W ILCOX { Auburn University and The Milken Institute, z Macrometrix, § Office of the Comptroller of the Currency and { University of California, Berkeley ABSTRACT Two central questions about the structure of bank supervision are whether central banks should supervise banks and whether to have multiple supervisors. We use data for 70 countries across developed, emerging and transition economies to estimate statistical connections between banking performance, the structure of bank supervision, permissible banking activities, legal environments, banking market structure and macro- economic conditions. We find that where central banks supervise banks, banks tend to have more non-performing loans. Countries with multiple supervisors have lower capital ratios and higher liquidity risk. We also find that conclusions from non-transition economies may not necessarily apply to transition economies. I. INTRODUCTION Debate about the appropriate structure and purview of bank supervision has taken on more urgency in recent years. 1 In part, this is because banking crises have become much more frequent in the past two decades than previously and have often imposed on taxpayers huge, direct resolution costs and indirect costs through disruptions to macroeconomic performance. 2 In addition, many transition economies privatized their banks and needed to build bank supervision virtually from scratch. Analytical and technological advances in telecom- munications further blurred traditional distinctions between banking and other * The authors would like to thank Richard Levich, John J. McConnell, Joe Peek, Gary Whalen, conference participants at the 2001 FMA Meetings and anonymous referees for their comments and suggestions. The opinions expressed in this paper are those of the authors alone and do not necessarily represent those of the Office of the Comptroller of the Currency or the United States Department of the Treasury. The authors alone are responsible for any errors. 1 The term supervision is used to represent regulation as well except where otherwise noted. 2 Caprio and Klingebiel (2002) provide a comprehensive cataloguing of 113 systemic banking crises in 93 countries since the late 1970s. s International Review of Finance Ltd. 2004. Published by Blackwell Publishing Ltd., 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

Choosing the right financial system for growth

Abstract: Well-functioning financial systems promote economic growth by channeling funds from those who save to those who invest in the productive capacity of economies. What are the main features of a well functioning system? Are well developed capital markets essential to the process? Or are commercial banks and other “private” sources of capital capable of bringing about the same levels of growth and prosperity? In this article, the authors use information about the financial systems of a large number of both developed and developing countries to examine various relationships between a country's financial structure and its overall economic performance. Perhaps most important, the authors report a significantly positive correlation, using data for 34 countries, between the size of a country's financial system—measured by the total of commercial bank assets, equity market capitalization, and bonds outstanding—and economic development (as measured by GDP per capita). At the same time, the authors also provide evidence that banks (or loans) and capital markets (or securities) are complements, not substitutes, in promoting economic development, and that the presence of foreign-owned banks (though not state-owned banks) has a positive association with growth. In other words, both private banks and capital markets are likely to play important, though different roles in channeling funds from savers to investors.