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

Thierry Tressel (), Enrica Detragiache () and Demirgüç-Kunt, Asli
Authors registered in the RePEc Author Service: Asli Demirguc-Kunt

No 06/242, IMF Working Papers from International Monetary Fund

Abstract: This paper studies whether compliance with the Basel Core Principles for Effective Banking Supervision (BCPs) improves bank soundness. 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 provision2. Specifically, countries that require banks to regularly and accurately report 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, and reverse causality. Measuring soundness through Z-scores yields similar results. These 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.

Keywords: Bank soundness; regulation and supervision; Basel Core Principles; Bank soundness; Bank supervision; Basel Core Principles (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-reg
Date: Written 2006-10-27
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Working Paper: Banking on the principles: compliance with Basel Core Principles and bank soundness (2006)
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