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

Author/Editor: Demirgüç-Kunt, Asli | Detragiache, Enrica | Tressel, Thierry
Authorized for Distribution: October 1, 2006
Electronic Access: Free Full Text (PDF file size is 245KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
 
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Series: Working Paper No. 06/242
Subject(s): Bank soundness | Bank supervision | Basel Core Principles
Author's keyword(s): Bank soundness | regulation and supervision | Basel Core Principles
 
English  
    Published:   October 1, 2006        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA2006242   Pages:   33
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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