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

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.

Bibliographic Details

Main Authors:	Detragiache, Enrica, Demirgüç-Kunt, Aslı, Tressel, Thierry
Language:	English
Published:	World Bank, Washington, DC 2006-06
Subjects:	ACCOUNTING, ACQUISITIONS, AGENTS, APPLICATIONS, AUDITING, AUDITORS, AUTONOMY, BANK ASSETS, BANK MANAGEMENT, BANK RATINGS, BANK REGULATION, BANK SOLVENCY, BANK SUPERVISION, BANKING CRISES, BANKING INDUSTRY, BANKING LAWS, BANKING REGULATION, BANKING SECTOR, BANKING SUPERVISION, BANKING SYSTEM, BANKING SYSTEMS, BANKS, BORROWING, BORROWING COSTS, CAPITAL ADEQUACY, CAPITAL ADEQUACY RATIOS, CAPITAL REGULATION, CAPITALIZATION, COMMERCIAL BANK, CONSOLIDATED SUPERVISION, CONTRACT ENFORCEMENT, CORPORATE CONTROL, CORPORATIONS, CREDIT MARKETS, CREDIT POLICIES, CREDIT RATINGS, CROSS COUNTRY EXPERIENCE, DEBT, DEPOSIT INSURANCE, DEPOSITORS, DEREGULATION, DISCLOSURE REQUIREMENTS, DISTRESSED BANKS, ECONOMIC GROWTH, ECONOMICS, EMERGING MARKETS, EUROPEAN CENTRAL BANK, EXTERNAL AUDITORS, FINANCIAL CRISES, FINANCIAL CRISIS, FINANCIAL DATA, FINANCIAL INSTITUTION, FINANCIAL INTERMEDIATION, FINANCIAL MARKETS, FINANCIAL POLICIES, FINANCIAL SERVICES, FINANCIAL STABILITY, FINANCIAL STATEMENTS, FINANCIAL STRENGTH, FOREIGN BANKS, GLOBALIZATION, INFLATION, INFORMATION DISCLOSURE, INSTITUTIONAL DEVELOPMENT, INTEGRITY, INTEREST RATES, INVESTIGATION, LAWS, LEGAL FRAMEWORK, LIMITED, LIQUID ASSETS, LIQUIDITY, LIQUIDITY REQUIREMENTS, MACROECONOMIC POLICIES, MARKET DISCIPLINE, MIDDLE EAST, MORAL HAZARD, NORTH AFRICA, OPERATING COSTS, PORTFOLIOS, PROFITABILITY, PRUDENTIAL REGULATION, PRUDENTIAL REGULATIONS, PRUDENTIAL REQUIREMENTS, RATING AGENCIES, REGULATORY FRAMEWORK, RESERVES, RETURN ON ASSETS, RETURN ON EQUITY, RISK MANAGEMENT, RISK MANAGEMENT PROCESS, STATE BANKS, SUB-SAHARAN AFRICA, SUBORDINATED DEBT, SUPERVISORY AUTHORITIES, SUPERVISORY REGIMES, SUPERVISORY SYSTEM, SYSTEMIC BANKING CRISES, TRANSPARENCY, VOLATILITY,
Online Access:	http://documents.worldbank.org/curated/en/2006/06/6877442/banking-principles-compliance-basel-core-principles-bank-soundness https://hdl.handle.net/10986/8405
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