As the world becomes even more globalised and interconnected, the role of financial and banking regulation becomes even more crucial. If you get it wrong, then you can very well see firms move out or move their business out of your domain into somewhere else. One of the most high profile examples is the high impact of SOXA on the US industry, with firms moving their businesses out or not deciding to open up in the USA or not to raise funds in the USA. LINK! So it is but natural that i keep a very beady eye out on how banking regulation works around the world.
I came across this paper by Professor Tao Li from the School of Oriental and African Studies in London which has researched the shape of banking regulation across 118 countries with data taken from the World Bank, for a period between 1998 and 2000. While one can consider this time period to be too old, it is not too old once one considers the fact that changes in banking regulation and the consequent change in financial institution behaviour take few years to feed through. So I am ok with 7 years old data, it wouldnt change the results that much, but by 2010 we might have to reconsider the findings. The author analyses the results via four regulation dimensions namely the extent of government ownership of banks, the intensity of direct regulation of banks, the amount of measures to empower outside investors to monitor banks and the comprehensiveness of explicit deposit insurance. The author finds, as expected, correlations between banking measures with banking efficiency, development and overall financial development. In other words, good regulations live in symbiotic relationship with banking and financial market development. Again a d'oh statement but something that people tend to forget far too easily in my opinion. And as the history of the USA and banking reform has shown, it is far too easy to make knee jerk regulations and then a bad law end up creating far bigger problems than it was supposed to resolve.
All this to be taken with a grain of piquant salt!!!
Abstract
This article empirically investigates the patterns, determinants and impact of banking regulation in a large cross section of countries. Major differences of banking regulation across countries are found to be in four dimensions, i.e., the extent of government ownership of banks, the intensity of direct regulation of banks, the amount of measures to empower outside investors to monitor banks and the comprehensiveness of explicit deposit insurance. Based on these four dimensions, we identify five different patterns of banking regulation around the world. The article then tests economic, legal and cultural theories of the determinants of banking regulation, and finds dominant support for economic theory. Assessment regressions present evidence of different correlations of various banking regulation measures with banking efficiency, development and overall financial development. The findings imply a ‘big push’ view of reforming banking regulation, i.e., a big push to economic and financial sector development will lead tosubsequent improvements in banking regulation, which in turn will help the country’s banking and financial development.
Keywords: Banking regulation, law, culture, economic development, bankingefficiency, banking development, financial development
Li, Tao, JOURNAL OF EMERGING MARKET FINANCE, 6:1 (2007)
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