Banking on the Principles: Compliance with Basel Core Principles and Bank Soundness

By E. Detragiache, T. Tressel, Asli Demirgüç-Kunt. Social Science Research Network, 2006

397 citations recorded by the source corpus.

This paper studies whether compliance with the Basel Core Principles for Effective Banking Supervision (BCP) improves bank soundness. BCP compliance assessments provide a unique source of information about the quality of bank supervision and regulation around the world. The authors find a significant and positive relationship between bank soundness (measured with Moody's financial strength ratings) and compliance with principles related to information provision. Specifically, countries that require banks to report regularly and accurately their financial data to regulators and market participants have sounder banks. This relationship is robust to controlling for broad indexes of institutional quality, macroeconomic variables, sovereign ratings, as well as reverse causality. Measuring soundness through z-scores yields similar results. The findings emphasize the importance of transparency in making supervisory processes effective and strengthening market discipline. Countries aiming to upgrade banking regulation and supervision should consider giving priority to information provision over other elements of the Core Principles.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/0fc319858f8803d63ccc8998461e3840380ac35e

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Citations in the corpus

Financial Development in 205 Economies, 1960 to 2010 (2013, neutral): “…to the probability of a financial institution’s insolvency, that is, the probability that the value of its assets becomes lower than the value of its debt [see, for example, Boyd and Runkle (1993); Beck et al. (2006); Demirgüç-Kunt et al. (2008); Laeven and Levine (2009); Čihák and Hesse (2010)].”
The impact of banking regulations on banks' cost and profit efficiency: Cross-country evidence (2009, methodology): “Finally, it is more appropriate to use the sample for this type of banks since, as mentioned in Demirguc-Kunt et al. (2004), the regulatory data of the WB database are for commercial banks.”
Bank Risk Taking and Liquidity Creation Following Regulatory Interventions and Capital Support (2011, neutral): “, Diamond (1984); Ramakrishnan and Thakor (1984); Boyd and Prescott (1986)).”
Ownership Structure and Risk-Taking: Comparative Evidence from Private and State-Controlled Banks in China (2014, methodology): “We also use the non-performing loan ratio (NPL) and the capital adequacy ratio (CAR) by following Demirgüç-Kunt et al. (2006), Shehzad et al. (2010), and Delis and Kouretas (2011).”
Factors that Matter for Financial Inclusion: Evidence from Peru (2015, neutral): “This information can be useful for designing both public policies by governments (Demirgüç-Kunt et al., 2008) and new products and access channels by financial institutions.”
Who Disciplines Bank Managers? (2009, neutral): “28 29 34 APPENDIX I. MEASURING BANK SOUNDNESS USING THE Z-SCORE The Z-Score is a frequently used measure of bank soundness (e.g., Mercieca, Schaeck, and Wolfe, 2007; Stiroh, 2004a, 2004b; Demirgüç-Kunt, Detragiache, and Tressel, 2008).”
Supervisory Effectiveness and Bank Risk (2011, methodology): “7 This approach has been also followed by Fernández and González (2005) and Pasiouras et al. (2006), among others.”
Banking supervision and nonperforming loans: a cross-country analysis (2009, background): “On the other hand, Demirguc-Kunt et al. (2008) find that sounder banks are located in countries where financial data on banks have to be reported regularly and accurately to regulators and market participants: H9.”