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A Retrospective on Bank Regulation and Supervision Around the World

A Retrospective on Bank Regulation and Supervision Around the World . James R. Barth Penny Prabha Auburn University and Milken Institute Milken Institute Capital Flows and Financial Liberalization Annual CEMP-CIEPS FORUM

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A Retrospective on Bank Regulation and Supervision Around the World

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  1. A Retrospective on Bank Regulation and Supervision Around the World • James R. Barth Penny Prabha • Auburn University and Milken Institute Milken Institute • Capital Flows and Financial Liberalization • Annual CEMP-CIEPS FORUM • March 13, 2014 • Arlington, Virginia

  2. Motivation: More Frequent (and Severe) Banking Crises Worldwide Sources: Reinhart and Rogoff (2008), Milken Institute.

  3. Motivation: Frequency of Recent Banking Crises1970 - 2011 Source: Laeven, Valencia (2012).

  4. Motivation:Cost of Banking Crises 2007 - 2011 Source: Laeven, Valencia (2012).

  5. Motivation: Cost of Banking Crises Banking Crises Outcomes, 1970-2011 Source: Laeven, Valencia (2012).

  6. Motivation: U.S. History of CrisesMore Regulators with More Power Federal Financial Depository Housing Institutions Reform, Institutions Federal Finance Recovery and Deregulation Reserve Act Regulatory Enforcement Act and Monetary (1913) Reform Act (1989) Control Act (Bank runs) (2008) (S&L crisis) (1980) Dodd – Frank (S&L crisis) Wall Street 1860 1980 2000 Reform and Consumer 1940 1960 1880 1920 1900 2010 Protection Act National (2010) Bank Act Garn - St Emergency Germain (1864) Federal Federal Economic Depository Deposit Deposit Sarbanes Stabilization Institutions Act (Civil Insurance Insurance Oxley Act Act War & (1982) National Corporation Corp. & SEC (2002) (2008) wildcat (S&L crisis) Currency Act Improvement (Great (Enron and banking) (1863) Act Depression) WorldCom (1991) bankruptcies) (Banking crisis)

  7. Bank Regulation and Supervision Matter • Fed Chairman Ben Bernanke said, “stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.” • Measuring bank regulation and supervision around the world is hard. • Yet, as Lord Kelvin said, “[I]f you cannot measure it, you cannot improve it.”

  8. Countries Participating in the World Bank Surveys

  9. Countries and Questions in the World Bank Surveys • Survey I (1999): 118 countries and 180 questions • Survey II (2003): 151 countries and 275 questions • Survey III (2006): 143 countries and 300 questions • Survey IV (2011): 143 countries and 270 questions • Surveys I-IV: 84 countries

  10. Data and Indexes • The dataset includes information on: the organization of national banking authorities, the details of financial regulation and supervision, and the size and structure of the banking systems. • About 50 indexes of policies are constructed to measure: capital requirements, ownership restrictions, deposit insurance generosity, allowable activities, among other regulatory and supervisory policies.

  11. Aggregating the Data: the Art and Science of Forming Indexes

  12. Dataset for Surveys I-IV James Barth • http://business.auburn.edu/~barthjr/Web%20Dataset.htm Jerry Caprio • http://econ.williams.edu/people/gcaprio Ross Levine • http://faculty.haas.berkeley.edu/ross_levine/Regulation.htm

  13. Bank Assets / GDP Ratio

  14. Differences in Total Assets of Big U.S. Banks Due to Differences in the Accounting Treatment of Derivatives Q2 2012 Sources: BankScope, Bloomberg, annual reports, and Milken Institute.

  15. Total Bank Assets / GDP

  16. Percentage of Assets Accounted for by 5 Largest Banks

  17. Percentage of Total Bank Assets Government Owned

  18. Percentage of Total Bank Assets Foreign Owned

  19. Regulatory Restrictions on Bank Activities and the Mixing of Banking and Commerce

  20. New Survey IV Information: Bank Supervisory Criteria for Assessing Systemic Risk Number of Countries Reporting Yes for Each Factor

  21. New Survey IV Information: Statutory Corporate Tax Rate on Domestic Bank Income

  22. Convergence • We attempt to assess whether bank regulatory and supervisory practices have converged across countries. • One way to do so is to calculate the normalized standard deviation in Survey I and Survey IV for each index. • Another way is to assess the number of countries that are x% different from the median value, where x equals 10%, 25%, 30%, and 50%.

  23. Was There a Convergence or Divergence in Regulation and Supervision Overtime? (Number of Countries with Index Values Different From the Median by At Least 10, 25, 30 or 50 Percent)

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