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The Changing Landscape of Bank Regulation: Quantitative Insights and Global Implications

This discussion at the 13th Dubrovnik Economic Conference delves into the evolution of bank regulation globally, examining the impact of reforms on financial stability, corruption, and economic growth. Through detailed data analysis and insightful observations, the session raises questions on the effectiveness of regulatory changes and emphasizes the importance of considering initial conditions and diverse outcomes across countries. Join the dialogue on the role of good regulation in shaping the future of financial systems.

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The Changing Landscape of Bank Regulation: Quantitative Insights and Global Implications

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  1. 13th Dubrovnik Economic ConferenceDiscussion - Paul Wachtel Bank Regulation is Changing: But for Better or Worse James R. Barth, Gerard Caprio, Ross Levine

  2. IFIs and Financial Structure • Prior to mid 1990s the IFIs focused on macroeconomics and development • Finance came to the fore • Levine’s research program • Caprio’s research group at World Bank • Financial crises forced issue • Followed by law-finance literatures • Emphasis on legal institutions, governance

  3. Bank regulation and supervision • World Bank surveys were logical consequence • Three waves – 1998/00, 2002 and 2005 • Extensive data on bank regulation, supervision – policies, structures, compliance • Challenge of this paper – quantify and aggregate data so that extensive survey information is informative. • Opportunity to examine cross country differences as well as changes

  4. Surprising observations • Changes around the world in last decade; age of ‘liberalization’ very uneven • More entry restrictions common • Strengthening of Basle pillars  more regulatory activity • Is this real? Or just appearances? • Do they actually reduce probability of failure or crisis? Do they effect intermediation process?

  5. Great data • Extensive information • Publicly available • There for all to see – • Needs no discussant • But, it is not so easy to interpret – that is the challenge.

  6. Does good regulation matter? I • Logit regression to explain probability of crisis • “restricting bank activities increases bank fragility” • Is this association or causality? • New survey shows a tendency towards increased activity restriction • Should we be forecasting an increase in crises in future?

  7. Does good regulation matter? II • Logit regression with firm level data on corruption of bankers • Increased supervisory powers are associated with more corruption. • Basel II is leading to an increase in the powers of supervisors and a concentrations of regulatory authority • Will Basel II result in more corruption?

  8. Does good regulation matter? III • Financial deepening (credit/GDP)  growth • Does good regulation  deepening? • Entry, capital regulation, supervisory powers do not matter • However, improved private monitoring does lead to financial deepening. • It is also associated with better performance (efficiency).

  9. Is Basle being oversold? • Data challenges our expectations – we would like to see that improvements in regulation lead to ‘good’ outcomes. • Simulations suggest that changes in regulation are not uniformly beneficial. • Perhaps regulation and supervision do not matter that much. • BUT….

  10. There is more to the story… Initial conditions matter • Which countries, with which initial conditions initiate reforms? • The effects of change depend on initial conditions.

  11. What’s ahead? • Great data • Lot’s of stories to be told. • Start of serious and important quantitative research agenda on regulation.

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