Showing papers by "James R. Barth published in 2002"

A Cross-Country Analysis of the Bank Supervisory Framework and Bank Performance

Abstract: Ongoing changes in the structure and nature of banking, as well as banking crises across the globe have focused the attention of policy makers on the appropriate structure, scope, and degree of independence of banking supervision. Key issues for banking supervision structure are whether there should be one or multiple supervisory authorities, and whether the central bank should be involved in bank supervision. The issue pertaining to the scope of supervision is whether bank supervisory authorities should supervise other financial service industries, including in particular securities and insurance. Finally, the issue regarding the independence of supervisory authorities is the degree to which bank supervisors should be subject to political and economic policy pressure and influence. How these issues are addressed is important, because policies that fail to provide for an appropriate bank supervisory framework may undermine bank performance and even lead to full-scale banking crises. The intense interest policy makers have shown in these issues has not been matched, however, by researchers. In particular, there is very little systematic empirical evidence on how, or indeed whether, the structure, scope, or independence of bank supervision affects the banking industry. This paper addresses this gap in three respects. First, drawing on the existing literature, we discuss the various policy issues surrounding the structure, scope, and degree of independence of bank supervision. Second, we provide comparative information on the actual choices that have been made regarding these three aspects of supervision across a wide range of developed and emerging market economies. Third, using both country-specific data for 55 countries in all parts of the world, and data for over 2,300 individual banks in those countries, we examine the relationship between the structure, scope, and independence of bank supervision and one key dimension of the banking industry - bank profitability. Our results indicate, at most, a weak influence for the structure of supervision on bank performance. In particular, we find some evidence that a single-supervisor system enhances bank performance. However, following our discussion of the caution one must use in interpreting data on the supervisory framework, our re-estimates using an alternative source of data on the structure of supervision failed to duplicate this result. Our results have a bearing on a key dimension of the policy debate on how to structure supervision. In particular, given the dearth of empirical evidence on the issues, advocates of one form or another of supervisory structure have asserted that a particular change is likely to affect (favorably or adversely, as the advocate sees fit) the performance of banks. Our results provide little support at best to the belief that any particular bank supervisory structure will greatly affect bank performance. This is significant, because it suggests that the on-going debate might more broadly focus on the impact of the supervisory structure on other aspects of the health of the banking system, including individual bank safety and soundness, systemic stability, and the development of the banking system.

Bank Safety and Soundness and the Structure of Bank Supervision: A Cross-Country Analysis

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 macroeconomic 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.

Financial Regulation and Performance: Cross-COuntry Evidence

Abstract: Costly bank failures in the past two decades have focused attention on the need to find ways to improve the performance of different countries'financial systems. Belief is overwhelming that financial systems can be improved but there is little empirical evidence to support any specific advice about regulatory and supervisory reform. With scant cross-country comparisons of financial regulatory and supervisory systems, economists cannot decide how to correct incentives and moral hazard problems in developing economies--whether, for example, to require higher (and more narrowly defined) capital-to-asset ratios, to mandate stricter definition and disclosure of non-performing loans, to require that subordinated debt be issued, or to install world-class supervision. Proposed reforms usually involve changes in financial regulations and supervisory standards, but many pressing questions about reform remain unanswered. Making use of a new database, the authors come up with brief answers to three key questions: Do countries with relatively weak governments and bureaucratic systems impose harsher regulatory restrictions on bank activities? Yes. Do countries with more restrictive regulatory regimes have poorly functioning banking systems. No--or at least the evidence is mixed. Do countries with more restrictive regulatory systems have less probability of suffering a banking crisis? No. In fact, the reverse is true. In countries where banks'securities activities are restricted, the likelihood of a banking crisis is greater, other things being equal. (This abstract was borrowed from another version of this item.)