The Impact of Regulation on Soundness of Banking: A Panel Data Approach

Mahshid Shahchera () and Nasim Jouzdani ()
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Mahshid Shahchera : Monetary and Banking Research Institute (MBRI), Central Bank of the Islamic Republic of Iran (CBI)
Nasim Jouzdani : Sanaie Higher Education Institution of Isfahan

Journal of Money and Economy, 2012, vol. 6, issue 2, 191-209

Abstract: The recent financial crisis has shown that the reforming in regulation and supervision is essential. This paper studies whether banking regulation improves bank soundness or more regulation lead to decrease soundness of banking. Specifically, countries which require banks to report regularly and accurately their financial data to regulators and market participants have sounder banks. In this paper, we test the quadratic relationship between regulation and sound banking with a panel data model during (2000-2009) for selected countries. The dependent variable in the study is the bank's financial soundness as measured by its Z-score. These findings emphasize the importance of regulation on banking system. The results show that regulation and financial soundness have significantly quadratic form because the sign of regulation-squared coefficient is negative and sign of coefficient of regulation is positive and significant, it could be said that quadratic hypothesis of above relationship can't be rejected.

Keywords: Bank Soundness; Banking Regulation and Supervision; Z-score (search for similar items in EconPapers)
JEL-codes: C13 C21 D01 K2 (search for similar items in EconPapers)
Date: 2012
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