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Banking on the principles: compliance with Basel Core Principles and bank soundness

Asli Demirguc-Kunt, Enrica Detragiache () and Thierry Tressel ()

No 3954, Policy Research Working Paper Series from The World Bank

Abstract: 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.

Keywords: Banks&Banking Reform; Financial Intermediation; Corporate Law; Financial Crisis Management&Restructuring; Insurance&Risk Mitigation (search for similar items in EconPapers)
Date: 2006-06-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-fmk and nep-ias
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Journal Article: Banking on the principles: Compliance with Basel Core Principles and bank soundness (2008) Downloads
Working Paper: Banking on the Principles; Compliance with Basel Core Principles and Bank Soundness (2006) Downloads
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