## _wp06242

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---

### Research question and data
- Core question: Whether better banking supervision and regulation (measured by compliance with the Basel Core Principles for Effective Bank Supervision—BCPs) is associated with sounder banks, and which elements of the regulatory framework are most closely related to bank soundness.
- Standard: Basel Committee on Banking Supervision’s Core Principles for Effective Bank Supervision (BCPs), issued in 1997, comprising 25 core principles.
- Compliance measurement: Assessments rate each of the 25 principles on a four-point scale; numerical values are aggregated and standardized to obtain an index varying between zero and one.
- Bank soundness measure: Moody’s financial strength ratings on a 15-point scale (E- to A+); alternative soundness measure: bank Z-scores = (average return on assets + equity/assets) / (standard deviation of the return on assets).
- Data sources: BCP assessments from IMF–World Bank FSAP (beginning 1999); Moody’s ratings and bank-level variables from Bankscope; macro variables from IMF International Financial Statistics.
- Sample coverage: BCP assessment data covers 67 countries; 39 countries have banks large enough to receive a Moody’s rating; baseline sample: 203 banks (205 or 260 observations appear across specifications/tables).

### Empirical framework and controls
- Dependent variable: Moody’s bank rating (ordered 15-point scale); robustness: transformed numerical index and ln(1+ Z-score).
- Main econometric model: ordered probit for limited dependent variable; OLS used for robustness; standard errors clustered by country.
- Baseline regression form (notation preserved): ,4 321 ijj jijjij controlsmicmacroecono nsinstitutiosticscharacteribankcomplianceRating εβ βββα ++++= (1)
- Bank characteristic controls:
  - Size: logarithm of bank assets (LogTA).
  - Profitability: ROAA or ROAE.
  - Capitalization: ETA (equity in percent of total assets).
  - Loan activity: NLTA (net loans-to-assets).
  - Ownership dummies: Foreign owned; State owned; Non commercial bank.
- Institutional and macro controls:
  - Index of rule of law (Kaufman, Kraay, and Mastruzzi (2003)).
  - Alternative institutional measures: lack of corruption, contract enforcement, GDP per capita.
  - Macroeconomic controls: Depreciation (average annual depreciation of the nominal exchange over the previous 5 years), Inflation (average annual over previous 5 years), Standard deviation of inflation, Real credit growth (average annual over previous 5 years), Real GDP per capita growth.
  - S&P sovereign rating index used in some specifications.

### Main empirical findings — aggregate BCP index
- Aggregate relationship:
  - Baseline OLS coefficient on BCP compliance index: 4.927 [7.38]*** (Table 6).
  - Alternative coefficients reported across specifications include: 4.259 [4.94]***; 4.363 [5.18]***; 4.125 [4.98]***; 2.626 [3.10]***; 2.805 [3.41]***; 1.647 [2.01]**; 1.448 [1.66]*; 1.855 [1.75]*; 0.686 [0.69]; 0.14 [1.48].
  - Observations across specifications: 260; 206; 206; 203; 203; 203; 203; 205; 203; 132; 180; 203.
- Sensitivity:
  - Positive correlation between BCP compliance and bank ratings is sensitive to controls for institutional quality (rule of law) and to exclusion of outliers; significance falls from one percent to five percent when controlling for sovereign rating, and to ten percent when controlling for rule of law.
  - Excluding advanced country banks does not change results materially; excluding extreme observations often reduces coefficient size and significance.
  - Estimating with OLS instead of ordered probit can make significance disappear in some specifications.
- Other robust correlates:
  - Total assets (LogTA) is a consistent positive correlate: e.g., 0.214 [3.81]*** in baseline.
  - State-owned banks associated with lower ratings: e.g., -0.658 [2.95]*** in baseline.
  - Foreign-owned banks often have positive coefficients (e.g., 0.32 [1.65]* baseline) but significance varies by specification.
  - Rule of law positively associated with bank ratings (coefficients around 0.5–0.9 with significance).

### Results by BCP chapter and emphasis on information provision (Chapter 5 / Principle 21)
- Chapter-level findings (Table 7):
  - Chapter 2 (licensing and structure): significant at one percent (e.g., 2.538 [3.71]*** in reported column).
  - Chapter 5 (information requirements / transparency, Principle 21): significant at one percent in many specifications (e.g., 2.037 [3.17]***; 1.573 [2.13]** reported).
  - Chapter 1 (preconditions for effective supervision): significant at ten percent in some specifications (e.g., 1.14 [1.73]*).
  - When controlling for compliance with remaining principles, only Chapter 5 remains consistently significant.
- Robustness of Chapter 5 effect:
  - Chapter 5 remains positively and significantly associated with bank ratings when:
    - Excluding advanced countries.
    - Excluding extreme observations.
    - Adding macro controls (Depreciation, Inflation, Standard deviation of inflation, Real credit growth, Real GDP per capita growth).
  - Among macro variables, Depreciation and Standard deviation of inflation are negatively and significantly associated with bank ratings; level of Inflation, Real GDP growth, and Real credit growth not significant in many specs.
  - Additional transparency controls: IMF SDDS frequency index positive and significant; SDDS timeliness index not significant; Chapter 5 remains significant when including these indices.
  - Inclusion of four BCL indexes (discipline, disclosure, auditing, lack restrictions): once Chapter 5 is controlled, only the disclosure index has a significant coefficient and it is negative (suggesting disclosure requirements without enforcement may be detrimental).
- Magnitude example (marginal effect estimate):
  - Using marginal effects at sample mean and assuming constant elasticity, a decline in compliance from largely compliant to materially non-compliant would lower by one notch the rating of a bank rated D (from D to D-).

### Endogeneity, instrumental variables, and causal interpretation
- Endogeneity concerns:
  - Countries choose compliance levels; reverse causality possible if sounder banks make it easier to enact rigorous supervision, or if distress leads to upgrades.
  - Bank-level ratings unlikely to directly affect country-level supervisory compliance, but assessor perceptions and political processes could introduce endogeneity.
- Instrumental variables approach (Table 9):
  - Instruments: legal origin dummies (French, German, Scandinavian, Socialist, with English as omitted base), and religion in alternative tests.
  - First-stage: legal origin variables jointly highly significant; F-statistics for excluded IVs: 22.67; 21.53; 19.34; 15.59; 13.36; 21.45 (p value 0 for all); Partial R-squared: 0.14; 0.17; 0.11; 0.1635; 0.14; 0.12.
  - Second-stage: compliance with Chapter 5 remains positive and significant across 2SLS specifications:
    - Second-stage coefficients on Chapter 5: 0.623 [2.86]***; 0.496 [2.49]**; 0.715 [3.00]***; 0.536 [2.37]**; 0.689 [2.73]***; 0.715 [2.83]***.
  - Diagnostics: Hansen J test statistics and p values indicate instrument validity in reported columns (e.g., 1.260 (p value 0.740); 3.150 (p value 0.370); 2.060 (p value 0.560); 4.360 (p value 0.230); 1.410 (p value 0.700); 0.660 (p value 0.880)).
  - CLR confidence intervals (robust to weak instruments) and alternative instrument religion give similar results.
  - Other instruments tested (latitude, ethnic fractionalization) had poor predictive power for BCP compliance.

### Alternative soundness measure — Z-scores (Table 10)
- Z-score construction:
  - (average return on assets + equity/assets) / (standard deviation of the return on assets).
  - Average and standard deviation computed over 1995–2003 when data available; average number of years used slightly above 6 years.
  - Dependent variable in regressions: ln(1+ Z-score).
- Findings with Z-scores:
  - Z-scores and Moody’s ratings: positive correlation, about 20 percent.
  - Regression results mirror Moody’s-based results:
    - Overall compliance index positive but not significant.
    - Chapter 5 (information provision) is the only chapter robustly associated with higher Z-scores (e.g., Index chapter 5: 2.014 [3.58]***; 1.979 [3.66]*** in reported columns).
  - Total assets and overheads/total assets show expected correlations with Z-scores in reported specifications.

### Descriptive patterns and correlations
- Aggregate averages (Table 2 average/total row):
  - Avg. Bank Rating: 0.63 (duplicate column shows 0.39 in one listing).
  - GDP per capita: 13843.
  - Rule of Law: 0.63.
  - Growth: 0.02.
  - Depreciation: 0.15.
  - ROAA: 0.8.
  - ROAE: 6.1.
  - NLTA: 50.9.
  - ETA: 8.6.
  - LogTA: 13.4.
  - No. of Banks (total observations): 205.
  - Foreign-owned (count): 28.
  - State-owned (count): 27.
- Correlations (selected, from Tables 3–5):
  - Overall BCP index correlated with Preconditions/effective supervision: 0.77.
  - Information requirements correlate with Overall index: 0.77.
  - Bank rating correlated with Total assets (logs): 0.63.
  - Net loans-to-assets correlated negatively with Bank rating: -0.22.
  - Avg. bank rating correlated with Country rating: 0.69.
  - Avg. bank rating correlated with Rule of law: 0.76.
  - GDP per capita correlated with Rule of law: 0.85.
  - Depreciation correlates negatively with Avg. bank rating: -0.43.

### Appendix highlights — Principle 21 (Information Requirements)
- Principle 21 summary:
  - Each bank must maintain adequate records enabling supervisors to obtain a true and fair view of financial condition, and must publish on a regular basis financial statements that fairly reflect its condition.
- Key supervisory expectations:
  - Accounting standards: report instructions to establish accounting standards, preferably those with wide international acceptance and aimed at banking institutions.
  - Scope and frequency: supervisors determine scope/frequency; reports may be monthly, quarterly, annual, or event-generated; filing status may depend on size, structure, activities.
  - Confirmation of accuracy: bank management responsible; external auditors to express opinion on annual accounts; supervisors may require corrective action or approve issue of accounts if auditors are weak.
  - Confidentiality: supervisors must hold sensitive information confidential to build mutual trust and enable cross-border cooperation.
  - Disclosure: banks should disclose comprehensive, timely, and non-misleading information to the public to allow market assessment of risk.
- Minimum periodic reporting should include:
  - a bank's balance sheet; contingent liabilities; income statement; supporting details and key risk exposures.
- Enforcement:
  - Deliberately or recklessly false or materially misleading information should trigger supervisory and/or criminal action against individuals and institutions.

### Policy implications and conclusions
- Central empirical result:
  - Compliance with information provision (Chapter 5 / Principle 21) is positively and robustly associated with bank soundness across multiple specifications, instrumental variable estimations, and when using alternative soundness measures (Z-scores).
- Policy recommendation:
  - Countries aiming to upgrade banking regulation and supervision should consider prioritizing information provision—timely, accurate financial reporting to regulators and market participants—over focusing solely on aggregate compliance scores.
  - Rationale: information provision is a necessary condition for effective discipline; timely disclosure strengthens monitoring by regulators and markets and is consistently linked to higher bank ratings and Z-scores in the analysis.
- Caveats:
  - Sample limited to larger banks with Moody’s ratings; several low-income countries excluded.
  - BCP compliance data available at one point in time; analysis is cross-sectional.
  - Assessment ratings contain subjectivity despite standardized methodology and external reviewers.

*Source: _wp06242*

### References..............................................................................................................

### _wp06242 - References

### Introduction and research question
- Context: With increasing deregulation and globalization beginning in the 1980s, banking systems have become more fragile and banking crises have proliferated, causing or aggravating economic downturns and leading to significant fiscal costs (Caprio and Klingebiel, 1999).
- Core research question: Whether better banking supervision and regulation (measured by compliance with the Basel Core Principles for Effective Bank Supervision—BCPs) is associated with sounder banks, and which elements of the regulatory framework are most closely related to bank soundness.
- Standard used: The Basel Committee on Banking Supervision’s Core Principles for Effective Bank Supervision (BCPs), issued in 1997, comprising 25 core principles.
- Data source: Assessments of compliance with the BCPs conducted mainly within the IMF–World Bank Financial Sector Assessment Program (FSAP) since 1999; evaluations use a standardized methodology first published in 1999 and revised in April 2006.
- Compliance measurement: Assessors rate compliance with each of the 25 principles using a four-point scale; ratings reflect both laws/regulations and their implementation in practice.
- Bank soundness measure: Moody’s financial strength ratings on a 15-point scale, ranging from E- (least sound) to A+ (most sound). Advantage: evaluates solvency independent of the safety net.

### Literature context
- Demirgüç-Kunt and Detragiache (1998, 2002): Better institutions reduce likelihood of banking crises and moral hazard from deposit insurance, interpreting institutional variables as proxies for supervision and regulation.
- Barth, Caprio, and Levine (2001, 2004): Survey-based regulatory measures; find regimes that force accurate information disclosure, empower private monitoring, and foster private corporate control incentives promote bank performance and stability.
- Limitations of prior work: Survey data may capture laws on the books but not implementation; BCP compliance assessments aim to capture implementation as well.
- Prior empirical work using BCPs:
  - Sundararajan, Marston, and Basu (2001): Sample of 25 countries, overall BCP compliance not significant determinant of soundness (NPLs, loan spreads).
  - Podpiera (2004): Extended countries, finds better BCP compliance lowers NPLs.
  - Das and others (2005): Broader regulatory governance concept associated with sounder banks, especially where institutions are better.
- Transparency literature: Studies linking disclosure/transparency to better crisis performance, lower borrowing costs, and greater foreign portfolio investment (Patel, Balic, and Bwakira, 2002; Mitton, 2002; Glennerster and Shin, 2004; Gelos and Wei, 2005).

### Methodology and data
- Empirical framework: Cross-sectional bank-level regression; dependent variable is bank rating (Moody’s).
- Econometric model: Ordered probit for the 15-point limited dependent variable; robustness test using transformed numerical index and OLS.
- Standard errors: Clustered by country.
- Baseline regression form (notation preserved):
  ,4 321 ijj jijjij controlsmicmacroecono nsinstitutiosticscharacteribankcomplianceRating εβ βββα ++++= (1)
  - Subscript j denotes country and i denotes bank.
- Compliance index construction:
  - Assessors rate each of 25 principles on a four-point scale.
  - Numerical values assigned to ratings, aggregated, and standardized to obtain an index varying between zero and one.
  - Compliance indexes for subgroups of principles computed following Basel Committee chapter groupings.

### Key empirical findings
- Overall index:
  - An index of overall compliance with the BCPs is positively correlated with bank ratings after controlling for institutional quality, the macroeconomic environment, and bank characteristics.
  - However, this overall relationship is not very robust across specifications.
- Information disclosure (specific finding):
  - A very robust positive relationship is found between compliance with information provision (BCP No. 21) and bank soundness.
  - More specifically, countries where banks must regularly and accurately report financial data to regulators and market participants have more highly rated banks.
  - This result holds when addressing endogeneity via instrumental variables and when measuring bank soundness using Z-scores instead of Moody’s ratings.
- Endogeneity and robustness strategies:
  - Concern 1: BCP compliance may proxy for overall institutional and macroeconomic quality rather than supervision quality; controlled for broad indexes of institutional quality, macroeconomic variables, and sovereign credit ratings.
  - Concern 2: Endogeneity of supervision—countries choose compliance levels; countries with sounder banks may find it easier to enact rigorous supervision, while countries that experienced distress may have stronger incentives to upgrade supervision.
  - Strategy: Instrumental variables estimation (2SLS) employed to account for potential joint endogeneity.

### Sample and scope limitations
- Moody’s ratings restrict sample to larger banks; smaller banks not rated are excluded.
- Several low-income countries have no rated banks and are therefore excluded.
- Available BCP compliance data exist only at one point in time; analysis is cross-sectional and cannot exploit time-series variation.
- Assessment ratings contain an element of subjectivity, though a standardized Basel methodology and external expert reviewers aim to limit subjectivity and ensure comparability.

### Contributions and implications
- Measurement improvement: Using Moody’s bank ratings offers a comprehensive, internationally comparable measure of bank soundness that is independent of national safety nets.
- Novelty: First study to explore how compliance with different components (chapters/principles) of the BCPs affects bank soundness, identifying information disclosure (BCP No. 21) as particularly important.
- Policy implication (inferred from findings within source text): Prioritizing improvements in information reporting and transparency (BCP No. 21) could yield stronger associations with bank soundness than focusing solely on an aggregate compliance score.

*Source: _wp06242 - References*

### Appendix 1). Compliance for each chapter is used as an alternative variable of interest.

### _wp06242 - Appendix 1). Compliance for each chapter is used as an alternative variable of interest.

### Methodology and Control Variables
- Bank characteristics used as controls:
  - Size: logarithm of bank assets.
  - Profitability: return on assets or return on equity.
  - Capitalization: ratio of equity to total assets.
  - Loan activity: ratio of bank loans to total assets.
  - Ownership controls: government-owned, foreign-owned, and non-commercial bank indicator.
- Institutional quality controls:
  - Rule of law index from Kaufman, Kraay, and Mastruzzi (2003) used in baseline.
  - Alternative institutional measures tested: lack of corruption, contract enforcement, average of indexes, or GDP per capita.
- Macroeconomic controls considered in robustness tests:
  - Slow output growth, high inflation, depreciating currency, high real interest rates, rapid credit expansion.
  - S&P sovereign rating used as a comprehensive indicator of macroeconomic policy and institutional quality.
- Additional controls and data notes:
  - Liquidity variables excluded from baseline to preserve sample size; including liquidity does not change results.
  - Detailed variable definitions and sources are in Table 1 in the Appendix.

### Sample and Data Sources
- BCP compliance data from IMF and World Bank assessments beginning in 1999.
- Moody’s financial strength ratings and bank-level variables from Bankscope.
  - Bankscope reports current rating, last revision date, and prior rating only.
  - Banks with rating changes more than one year after BCP evaluation were dropped.
- Macroeconomic variables primarily from IMF’s International Financial Statistics.
- Bank ownership from Bankscope and miscellaneous sources; state-owned defined as government controlling share or sole owner.
- Sample coverage:
  - BCP assessment data covers 67 countries; 39 countries have banks large enough to receive a Moody’s rating.
  - Baseline sample: 203 banks.
  - Sample includes a few mutual banks, investment houses, and similar institutions. Excluding non-commercial banks does not change results.

### Descriptive Patterns and Correlations
- Regional and development patterns (Figure 1, Figure 2 summary):
  - Advanced countries have the highest BCP compliance.
  - East Asia and Sub-Saharan Africa are closer to meeting Basel standards than South Asia, Middle East and North Africa, and Latin America.
  - Highest compliance across chapters: licensing of banks and structure of banking market.
  - Lowest compliance across chapters: formal powers of supervisors.
- Correlations (Table 3–5 summary):
  - Compliance levels across chapter subgroups are all significantly and positively correlated.
  - Strongest compliance correlation: prudential regulation vs. methods of ongoing supervision (over 80 percent).
  - Correlations fall below 50 percent for principles regarding formal powers of supervisors.
  - Bank-level correlations (Table 4):
    - Strong positive correlation: bank size and bank soundness.
    - Higher ratings associated with: larger size, higher profitability, higher capitalization, lower loans-to-assets ratio.
    - State banks seen as more vulnerable.
    - Presence of large liquid assets associated with less favorable ratings (possible high compulsory liquidity or limited lending opportunities).
    - Foreign-owned banks do not receive significantly higher ratings overall.
  - Country-level correlations (Table 5):
    - Strong positive correlation: bank ratings with sovereign rating, rule of law index, and GDP per capita.
    - Rapid exchange rate depreciation associated with lower ratings.
    - Correlation between bank ratings and BCP compliance is positive, large, and significant.

### Main Results — Aggregate BCP Index (Table 6)
- Regression framework: bank financial strength ratings regressed on overall BCP compliance index, with ordered probit and OLS variants tested.
- Key findings:
  - BCP compliance index enters positively and significantly by itself and with bank controls.
  - Controlling for GDP per capita does not alter relationship.
  - Controlling for sovereign rating: coefficient on compliance becomes smaller; statistical significance drops from one percent to five percent.
  - Controlling for rule of law index: coefficient becomes even smaller; significance drops to ten percent.
  - Baseline specification uses rule of law as institutional control.
- Sensitivity:
  - Excluding advanced country banks does not change results materially.
  - Excluding extreme observations: coefficient of compliance becomes quite small and no longer significant.
  - Estimating model with OLS instead of ordered probit: significance disappears.
- Controls effects:
  - Larger banks rated significantly higher.
  - State-owned banks considered more vulnerable.
  - Foreign-owned banks rated more favorably in specifications including overall institutional quality, but not when restricting to developing countries.
  - Once controlling for bank size, ownership, and institutions, additional explanatory power of balance sheet variables is small.
- Interpretation:
  - Positive correlation between bank soundness and overall BCP compliance is sensitive to controls for institutional quality and to exclusion of outliers.

### Results by Group of Principles (Table 7)
- Seven BCP chapters tested one at a time in baseline specification.
- Significant associations with higher bank ratings:
  - Chapter 2 (licensing and structure): significant at one percent.
  - Chapter 5 (information requirements / transparency): significant at one percent.
  - Chapter 1 (preconditions for effective bank supervision): significant at ten percent.
- Robustness when controlling for compliance with remaining principles:
  - Constructed aggregate indexes excluding Chapters 1, 2, and 5 respectively.
  - Only Chapter 5 (information requirements) remains significant when controlling for compliance with other principles.
- Leave-one-country-out robustness:
  - Re-running specifications excluding individual countries one by one; Chapter 5 remains the only principle consistently significantly associated with bank soundness.
- Magnitude (marginal effect estimate):
  - Using marginal effects at sample mean and assuming constant elasticity, a decline in compliance from largely compliant to materially non-compliant would lower by one notch the rating of a bank rated D (from D to D-).

### Robustness of Information Provision Relationship and Reverse Causality
- Chapter 5 compliance remains positively and significantly associated with bank ratings when:
  - Excluding advanced countries.
  - Excluding extreme observations.
  - Adding macroeconomic controls: exchange rate depreciation, inflation rate and its standard deviation, real credit growth, real GDP per capita growth.
    - Among macro variables: exchange rate depreciation and inflation volatility negatively and significantly associated with bank ratings; level of inflation, real GDP growth, and real credit growth not significant.
- Additional transparency controls:
  - IMF’s Special Data Dissemination Standards frequency index: positive and significant.
  - Timeliness index: not significant.
  - Chapter 5 compliance remains significant when including these indices.
- Additional legal/regulatory design controls:
  - Four indexes from Barth, Caprio, and Levine (2001): discipline, information disclosure, auditing requirements, lack of banking restrictions.
  - Once Chapter 5 compliance is controlled, only the disclosure index has a significant impact on ratings and its coefficient is negative (suggesting many disclosure requirements without enforcement may be detrimental).

### Endogeneity and Instrumental Variables (Table 9)
- Endogeneity concerns:
  - Bank-level ratings unlikely to affect country-level supervisory quality; reverse causality limited but possible via assessors or political processes.
  - Focusing on Chapter 5 with controls for compliance with other chapters reduces omitted-country-characteristic bias.
- Instrumental variables approach:
  - Instruments: legal origin dummy variables (established practice in institutions literature).
  - First-stage: legal origin variables jointly highly significant; F-test for joint significance well above 10 (no weak instruments concern per Stock and Yogo, 2005).
  - Second-stage: compliance with information provision remains positive and significant in all specifications.
  - CLR confidence intervals (robust to weak instruments) confirm positive and significant effect of Chapter 5.
  - Alternative instrument: religion gives similar results.
  - Other instruments tested (latitude, ethnic fractionalization) have poor predictive power for BCP compliance.

### Alternative Soundness Measure — Z-Scores (Table 10)
- Z-score definition:
  - (average return on assets + equity/assets) / (standard deviation of the return on assets).
  - Interpreted as number of standard deviations below mean returns required to wipe out bank equity (Boyd and Runkle, 1993).
- Construction:
  - Average and standard deviation of returns computed 1995–2003 when data available.
  - Average number of years used slightly above 6 years.
  - Dependent variable in regressions: ln(1+ Z-score).
- Findings:
  - Z-scores and Moody’s ratings: positive correlation, about 20 percent.
  - Regression results mirror Moody’s-based results:
    - Overall compliance index positive but not significant.
    - Chapter 5 (information provision) is the only chapter robustly associated with bank soundness.
  - Additional macro controls (exchange rate depreciation, inflation, inflation volatility, credit growth) confirm the Chapter 5 finding.

### Conclusions and Policy Implications
- Central empirical result:
  - Compliance with information provision (Chapter 5 of the Basel Core Principles) is positively and robustly associated with bank soundness across multiple specifications, instruments, and when using alternative soundness measures.
- Policy recommendation:
  - Countries aiming to upgrade banking regulation and supervision should consider giving priority to information provision (timely, accurate financial reporting to regulators and market participants) over other elements of the core principles.
  - Rationale: information provision is a necessary condition for effective discipline; timely disclosure strengthens monitoring by regulators and markets.
  - This recommendation aligns with an approach that empowers market discipline and cautions against over-reliance on concentrated regulatory power.

*Source: _wp06242 - Appendix 1). Compliance for each chapter is used as an alternative variable of interest.*

### References

### References

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- Richards, Anthony, and David Deddouche, 1999, “Bank Rating Changes and Bank Stock Returns—Puzzling Evidence from the Emerging Markets,” IMF Working Paper 99/151 (Washington: International Monetary Fund).
- Schweitzer, Robert, Samuel H. Szewczyk, and Raj Varma, 1992, “Bond Rating Agencies and Their Role in Bank Market Discipline,” Journal of Financial Services Research, Vol. 6, No. 3, pp. 249–63.
- Sironi, Andrea, 2003, “Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues,” Journal of Money, Credit, and Banking, Vol. 35, No. 3, pp. 443–72.
- Stock, James H., and Motohiro Yogo, 2005, “Testing for Weak Instruments in IV Regressions,” in Identification and Inference for Econometric Models: Essays in Honor of Thomas Rothenber, ed. by Donald W. K. Andrews and James H. Stock (New York: Cambridge University Press).
- Sundararajan, V., David Marston, and Ritu Basu, 2001, “Financial System Standards and Financial Stability—The Case of Basel Core Principles,” IMF Working Paper 01/62 (Washington: International Monetary Fund).

---

### Basel Core Principles—Definitions

### Chapter 1: Preconditions for effective banking supervision
- Principle 1. Objectives, autonomy, powers, and resources
  - Principle 1(1). There should be clear responsibilities and objectives set by legislations for each supervisory agency
  - Principle 1(2). Each supervisory agency should possess adequate resources to meet the objective set, provided on terms that do not undermine the autonomy, integrity and independence of supervisory agency
  - Principle 1(3). A suitable framework of banking laws, setting bank minimum standard, including provisions related to authorization of banking establishments and their supervision
  - Principle 1(4). The legal framework should provide power to address compliance with laws as well as safety and soundness concerns
  - Principle 1(5). The legal framework should provide protection of supervisors for actions taken in good faith in the course of performing supervisory duties
  - Principle 1(6). There should be arrangements of interagency cooperation, including with foreign supervisors, for sharing information and protecting the confidentiality of such information

### Chapter 2: Licensing and Structure
- Principle 2. Definition of permissible activities
- Principle 3. Right to set licensing criteria and reject applications for establishments that does meet the standard sets.
- Principle 4. Authority to review and reject proposals of significant ownership changes.
- Principle 5. Authority to establish criteria for reviewing major acquisitions or investments

### Chapter 3: Prudential Regulations and Requirements
- Principle 6. Prudent and appropriate risk adjusted capital adequacy ratios must be set
- Principle 7. Supervisors should evaluate banks' credit policies
- Principle 8. Banks should adhere to adequate loan evaluation and loan-loss provisioning policies
- Principle 9. Supervisors should set limits to restrict large exposures, and concentration in bank portfolios should be identifiable
- Principle 10. Supervisors must have in place requirements to mitigate the risks associated with related lending
- Principle 11. Policies must be in place to identify, monitor and control country risks, and to maintain reserves against such risks
- Principle 12. Systems must be in place to accurately measure, monitor and adequately control markets risks and supervisors should have powers to impose limits or capital charge on such exposures
- Principle 13. Banks must have in place a comprehensive risk management process to identify, measure, monitor and control all other material risks and, if needed, hold capital against such risks
- Principle 14. Banks should have internal control and audit systems in place.
- Principle 15. Adequate policies, practices and procedures should be in place to promote high ethical and professional standards and prevent the bank being used by criminal elements

### Chapter 4: Methods of On-Going Supervision
- Principle 16. An effective supervisory system should consist of on-site and off-site supervision
- Principle 17. Supervisors should have regular contact with bank management
- Principle 18. Supervisors must have a means of collecting, reviewing and analyzing prudential reports and statistics returns from banks on a solo and consolidated basis
- Principle 19. Supervisors must have a means of independent validation of supervisory information either through on-site examinations or use of external auditors
- Principle 20. Supervisors must have the ability to supervise banking groups on a consolidated basis

### Chapter 5: Information Requirements
- Principle 21. Each bank must maintain adequate records that enable the supervisor to obtain a true and fair view of the financial condition of the bank of the bank, and must publish on a regular basis financial statements that fairly reflect its condition

### Chapter 6: Formal Powers of Supervisors
- Principle 22. Adequate supervisory measures must be in place to bring about corrective action when banks fail to meet prudential requirement when there are regulatory violations, or when depositors are threatened in any other way. This should include the ability to revoke the banking license or recommend its revocation.

*Source: _wp06242 - References*

### Chapter 7: Cross-Border Banking

### _wp06242 - Chapter 7: Cross-Border Banking

### Principles on Cross-Border Banking
- Principle 23: Supervisors must practice global consolidated supervision over internationally active banks, adequately monitor and apply prudential norms to all aspects of the business conducted by these banks.
- Principle 24: Consolidated supervision should include establishing contact and information exchange with the various supervisors involved, primarily host country supervisory authorities.
- Principle 25: Supervisors must require the local operations of foreign banks to be conducted at the same standards as required of domestic institutions, and must have powers to share information needed by the home country supervisors of those banks.
- Source: Core Principles for Effective Banking Supervision, Basel Committee on Banking Supervision, Basel, September 1997.

### Descriptive statistics (country and bank-level)
- Aggregate/average (Average/ total row in Table 2):
  - Avg. Bank Rating: 0.63
  - GDP per capita: 13843
  - Rule of Law: 0.63
  - Growth: 0.02
  - Depreciation: 0.15
  - Avg. Bank Rating (duplicate column listed): 0.39
  - ROAA: 0.8
  - ROAE: 6.1
  - NLTA: 50.9
  - ETA: 8.6
  - LogTA: 13.4
  - No. of Banks (total observations): 205
  - Foreign-owned (count): 28
  - State-owned (count): 27
- Selected country examples retained verbatim from Table 2 (illustrative, exact row values preserved in source):
  - BAHRAIN row includes: 0.56; 10591; 0.86; 0.01; 0.00; 0.44; 1.5; 14.2; 37.4; 10.3; 16.3; 3; 0; 1
  - BRAZIL row includes: 0.19; 4580; -0.19; 0.01; 0.20; 0.37; 2.1; 24.6; 27.1; 8.9; 15.2; 10; 4; 2
  - CANADA row includes: 1.00; 22745; 1.89; 0.03; 0.02; 0.67; 0.5; 9.4; 54.3; 5.3; 17.0; 3; 0; 0
  - (Additional country rows are present in Table 2 with the same structure.)

### Correlations among BCP chapters and other indices (Table 3, Table 4, Table 5)
- Correlations between BCP chapters (Table 3):
  - Overall index correlated with Preconditions/effective supervision: 0.77 (p-values shown in table).
  - Information requirements correlate with Overall index: 0.77 (p-values in italics in source).
  - Cross-border banking correlations and p-values are tabulated; p values noted as in-source (italics).
- Bank-characteristic correlations (Table 4):
  - Bank rating correlated with Total assets (logs): 0.63 (p-values in table).
  - Return on assets correlated with Return on equity: 0.77.
  - Net loans-to-assets correlated negatively with Bank rating: -0.22.
  - Capitalization correlations: capitalization with ETA 1.00 in its column (table shows capitalization relationships and p-values).
  - Foreign-owned and State-owned indicators correlations with bank characteristics are listed in the table (p-values in italics).
- Country-level correlations (Table 5):
  - Avg. bank rating correlated with Country rating: 0.69.
  - Avg. bank rating correlated with Rule of law: 0.76.
  - GDP per capita correlated with Rule of law: 0.85.
  - Depreciation correlates negatively with Avg. bank rating: -0.43 (p-values reported in table).
  - Percent foreign owned and Percent state owned correlations, and BCL (Banking Constraints Index) subcomponents (Lack restrictions, Auditing, Disclosure, Discipline) correlations are tabulated with p-values in italics.

### Impact of compliance with BCPs on bank ratings (Table 6)
- Index of compliance with BCPs (baseline effect on bank ratings):
  - Baseline OLS coefficient: 4.927 [7.38]***.
  - Other specifications (columns reported) include coefficients: 4.259 [4.94]***; 4.363 [5.18]***; 4.125 [4.98]***; 2.626 [3.10]***; 2.805 [3.41]***; 2.824 [2.94]***; 1.647 [2.01]**; 1.448 [1.66]*; 1.855 [1.75]*; 0.686 [0.69]; 0.14 [1.48].
  - Observations across specifications: 260; 206; 206; 203; 203; 203; 203; 205; 203; 132; 180; 203.
  - Methods of estimation used: OLS, Ordered probit (various columns).
- Controls and notable coefficients:
  - Foreign-owned: 0.32 [1.65]* in baseline; other columns report 0.252, 0.261, 0.261, 0.286, 0.277, 0.25, 0.381 [2.33]**, 0.406 [2.48]**, 0.308, 0.433 [1.59], 0.036 [1.87]*.
  - State-owned: -0.658 [2.95]*** in baseline; other columns: -0.721 [2.96]***; -0.702 [2.90]***; -0.709 [2.71]***; -0.724 [2.77]***; -0.677 [2.54]**; -0.772 [2.63]***; -0.505 [2.09]**; -0.515 [2.02]**; -0.521 [1.96]*; -0.499 [1.98]**; -0.499 [2.58]**.
  - Other banking institutions: 0.296 [2.02]** baseline; other specs vary, some insignificant.
  - Return on equity: coefficients around 0.005–0.008 (t-statistics shown; some specifications reach significance).
  - Capitalization: coefficients reported (e.g., 0.011; other specs include -0.01, -0.013, 0.018, 0.01, 0.028, 0.032, 0.029, 0.026, 0.002) with t-statistics in table.
  - Net loans-to-assets: small negative coefficients in some specs (e.g., -0.007; other specs near zero).
  - Total assets: 0.214 [3.81]*** (baseline); other columns: 0.205; 0.213; 0.216; 0.188; 0.074; 0.165; 0.022; noted significance across many columns ([3.81]***, [3.80]***, [4.07]***, [3.14]***, etc.).
  - Index of sovereign rating: coefficient reported in one specification: 1.284 [1.90]*.
  - Index of rule of law: coefficients reported across specifications e.g., 0.509 [1.97]**, 0.883 [3.28]***, 0.568 [2.14]**, 0.056 [2.15]** (as shown in the table).
- Fit statistics:
  - Pseudo R2 or R2 values reported across columns: 0.12; 0.1; 0.11; 0.11; 0.15; 0.15; 0.15; 0.18; 0.17; 0.12; 0.15; 0.55.
- Notes: Robust z statistics in brackets, observations clustered by country. Significance markers: * significant at 10%; ** significant at 5%; *** significant at 1%.

### Impact of individual BCP chapters and robustness (Table 7)
- Dropping countries one by one (selected coefficients reported across columns):
  - Foreign-owned: coefficients range, e.g., 0.427 [2.65]***; 0.309 [1.94]*; 0.409 [2.24]**; 0.394 [2.52]**; 0.38 [2.80]***; 0.397 [2.63]***; 0.403 [2.37]**; 0.449 [2.37]**; 0.186 [1.03]; 0.295 [1.8]*.
  - State-owned: coefficients negative across columns, examples: -0.52 [2.07]**; -0.575 [2.07]**; -0.443 [1.82]*; -0.381 [1.51]; -0.673 [2.35]**; -0.406 [1.64]; -0.447 [1.75]*; -0.498 [-1.86]*; -0.639 [-2.16]**; -0.691 [-2.14]**.
  - Other banking institutions: coefficients small and generally insignificant in many columns (e.g., 0.105 [0.56]; 0.234 [1.29]; 0.099 [0.50]).
  - Return on equity: examples include 0.008 [1.57]; 0.008 [1.58]; 0.013 [1.83]*; 0.01 [1.91]*; 0.007 [1.40]; 0.01 [1.99]**; 0.009 [1.82]*; 0.013 [1.73]*; 0.002 [0.31]; 0.002 [0.56].
  - Capitalization: coefficients near zero with mixed significance (e.g., -0.005 [1.00]; -0.006 [1.01]; -0.006 [0.98]; -0.007 [1.38]; -0.009 [1.61]; -0.008 [1.39]; -0.005 [0.95]; -0.004 [-0.63]; -0.001 [-0.14]; 0.560 [-0.77]).
  - Net loans-to-assets: examples 0.03 [1.42]; 0.036 [1.60]; 0.03 [1.39]; 0.035 [1.60]; 0.028 [1.52]; 0.038 [1.70]*; 0.039 [1.86]*; 0.027 [1.26]; 0.013 [0.54]; 0.013 [0.64].
  - Total assets: consistently positive and significant across specifications: 0.2 [3.47]***; 0.211 [3.74]***; 0.195 [3.04]***; 0.221 [3.22]***; 0.212 [3.59]***; 0.205 [3.38]***; 0.206 [3.52]***; 0.210 [3.34]***; 0.184 [2.65]***; 0.184 [2.85]***.
  - Index of rule of law: positive and significant in many columns: 0.551 [2.26]**; 0.5 [2.03]**; 0.603 [2.25]**; 0.724 [3.68]***; 0.434 [1.79]*; 0.744 [4.05]***; 0.576 [2.28]**; 0.575 [2.21]**; 0.939 [4.05]***; 0.858 [3.85]***.
- Individual chapter index coefficients (selected):
  - Index chapter 1: coefficient reported 1.14 [1.73]* in one specification.
  - Index chapter 2: coefficient 2.538 [3.71]*** (reported in table).
  - Index chapter 3: coefficient 0.568 [0.56] (reported).
  - Index chapter 4: coefficient -0.632 [-0.59] (reported).
  - Index chapter 5: coefficient 2.037 [3.17]*** and 1.573 [2.13]** in reported columns.
  - Index chapter 6: coefficient -0.509 [0.90].
  - Index chapter 7: coefficient 0.682 [1.31].
- Notes: table reports dropping countries one by one and associated coefficient robustness; t-statistics in brackets and significance markers preserved as in source.

### Key empirical findings (as presented in tables)
- Higher compliance with the Core Principles for Effective Banking Supervision (BCPs) is positively associated with higher bank ratings; baseline index coefficient 4.927 [7.38]***.
- Foreign ownership tends to be associated with higher bank ratings (positive coefficients, sometimes significant).
- State ownership is consistently associated with lower bank ratings (e.g., -0.658 [2.95]*** baseline).
- Bank size (Total assets, log) is a strong positive correlate of bank ratings (e.g., 0.214 [3.81]***).
- Rule of law is positively associated with bank ratings across multiple specifications (e.g., coefficients around 0.5–0.9 with significance).
- Some individual BCP chapters (e.g., chapter 2 and chapter 5 in reported columns) show strong positive associations with bank ratings in specific specifications.

*Source: _wp06242 - Chapter 7: Cross-Border Banking (tables and text reproduced from the provided chapter content).*

### chapter 1

### _wp06242 - chapter 1

### Chapter indicators and averages
- chapter 1: -0.399
  - bracketed value: [-0.26]
- chapter 2: 0.116
  - bracketed value: [0.07]
- Av. chapters, excl.
  - listed alongside chapter 1 and chapter 2 entries

*Source: _wp06242 - chapter 1*

### chapter 5

### _wp06242 - chapter 5

### Impact of Information Requirements (Table 8)
- Dependent variable: Compliance with Chapter 5
- Key coefficients (Ordered probit / OLS specifications shown across columns):
  - Compliance with Chapter 5: 2.108 [2.79]***; 2.128 [2.86]***; 2.089 [2.99]***; 0.187 [2.21]**; 2.324 [3.42]***; 2.884 [5.43]***; 2.326 [3.16]***; 2.098 [3.13]***; 2.407 [4.55]***; 2.053 [2.47]**; 1.89 [2.36]**
  - Foreign owned: 0.384 [2.58]***; 0.452 [2.70]***; 0.294 [1.44]; 0.032 [1.88]*; 0.398 [2.34]**; 0.44 [2.50]**; 0.315 [2.18]**; 0.416 [2.45]**; 0.461 [2.94]***; 0.382 [2.54]**; 0.374 [2.39]**
  - State owned: -0.627 [2.10]**; -0.605 [2.09]**; -0.521 [1.64]; -0.073 [2.57]**; -0.786 [2.40]**; -0.585 [1.93]*; -0.579 [1.94]*; -0.527 [1.81]*; -0.568 [2.06]**; -0.62 [2.09]**; -0.688 [2.39]**
  - Return on equity: 0.011 [1.61]; 0.02 [3.13]***; -0.001 [0.13]; 0.001 [1.92]*; 0.01 [1.29]; 0.01 [1.34]; 0.011 [1.63]; 0.011 [1.59]; 0.01 [1.37]; 0.011 [1.62]; 0.011 [1.55]
  - Net loans-to-assets: -0.009 [1.53]; -0.009 [1.30]; -0.005 [0.86]; -0.001 [1.15]; -0.009 [1.55]; -0.007 [1.26]; -0.009 [1.59]; -0.007 [1.24]; -0.003 [0.64]; -0.008 [1.48]; -0.007 [1.26]
  - Capitalization: 0.028 [1.42]; 0.025 [1.45]; 0.026 [1.17]; 0.002 [0.91]; 0.04 [1.99]**; 0.047 [2.74]***; 0.036 [1.73]*; 0.037 [1.93]*; 0.046 [2.76]***; 0.03 [1.48]; 0.043 [2.20]**
  - Total assets: 0.222 [3.62]***; 0.184 [3.04]***; 0.12 [1.95]*; 0.024 [3.46]***; 0.223 [3.62]***; 0.198 [3.52]***; 0.219 [3.62]***; 0.233 [3.78]***; 0.272 [4.45]***; 0.222 [3.58]***; 0.276 [4.00]***
  - Index of rule of law: 0.509 [2.25]**; 0.597 [2.71]***; 0.782 [3.16]***; 0.053 [2.21]**; 0.375 [1.53]; 0.373 [1.71]*; 0.613 [2.75]***; 0.561 [2.60]***; 0.827 [3.78]***; 0.517 [2.19]**; 0.507 [2.19]**
  - BCP compliance (excl. chapter 5): -0.648 [0.58]; -1.064 [0.93]; -0.686 [0.64]; -0.056 [0.46]; -0.296 [0.31]; -1.268 [1.44]; -0.706 [0.62]; -0.761 [0.76]; -1.044 [1.12]; -0.662 [0.61]; -0.68 [0.63]
- Additional specification-specific variables and coefficients reported:
  - Inflation: -0.005 [0.65] (appears in one column)
  - Inflation volatility (std. dev.): -0.008 [4.83]*** (appears in one column)
  - Depreciation: -0.835 [2.72]*** (appears in one column)
  - Macro data frequency: 0.347 [2.46]** (appears in one column)
  - Discipline (BCL): -0.882 [1.45] (appears in one column)
  - Disclosure (BCL): -2.882 [3.71]*** (appears in one column)
  - Auditing (BCL): 0.129 [0.34] (appears in one column)
  - Lack restrictions (BCL): -0.916 [1.86]* (appears in one column)
- Observations and model fit:
  - Observations vary by column: 203; 203; 189; 203; 203; 203; 203; 186; 166; 175 (top of table) and 189; 167; 118; 189; 176; 167; 189; 189; 189; 189; 189 (bottom block)
  - Pseudo R2 values reported: 0.17; 0.18; 0.17; 0.17; 0.19; 0.17; 0.17; 0.1736; 0.2432; 0.25; and 0.19; 0.19; 0.15; 0.59; 0.2; 0.19; 0.2; 0.2; 0.22; 0.19; 0.2
- Notes: Robust z statistics in brackets, observations are clustered by country. * significant at 10%; ** significant at 5%; *** significant at 1%.

### Bank Ratings and Information Transparency: Instrumental Variables Regressions (2SLS) (Table 9)
- Second-stage coefficients for Compliance with Chapter 5:
  - Column (1): 0.623 [2.86]***
  - Column (2): 0.496 [2.49]**
  - Column (3): 0.715 [3.00]***
  - Column (4): 0.536 [2.37]**
  - Column (5): 0.689 [2.73]***
  - Column (6): 0.715 [2.83]***
- Other second-stage coefficients (selected):
  - Foreign owned: 0.020 [0.83]; 0.019 [0.94]; 0.021 [0.76]; 0.029 [1.39]; 0.021 [0.73]; 0.018 [0.61]
  - State owned: -0.124 [2.78]***; -0.113 [3.02]***; -0.116 [2.43]**; -0.096 [2.49]**; -0.103 [2.23]**; -0.138 [2.62]***
  - Return on equity: 0.000 [0.21]; 0.000 [0.22]; 0.000 [0.48]; 0.000 [0.20]; 0.000 [0.25]; 0.000 [0.49]
  - Net loans-to-assets: -0.001 [1.28]; -0.001 [1.36]; -0.001 [1.19]; -0.002 [1.49]; -0.001 [1.45]; -0.001 [1.21]
  - Total assets: 0.023 [2.89]***; 0.023 [2.60]***; 0.017 [2.02]**; 0.018 [2.56]**; 0.011 [1.28]; 0.023 [2.62]***
  - Capitalization: -0.001 [0.16]; 0.000 [0.11]; 0.001 [0.36]; 0.002 [0.71]; 0.002 [0.72]; 0.003 [0.96]
  - Index of rule of law: -0.024 [0.69]; -0.044 [1.15]; -0.031 [0.84] (reported in some columns)
  - Inflation: 0.000 [0.31] (appears in one column)
  - Standard deviation of inflation: -0.002 [3.64]*** (appears in one column)
  - Index of sovereign rating: 0.103 [1.24]; 0.025 [0.31] (appears in two columns)
  - Depreciation: -0.092 [1.24]; -0.042 [0.44] (appears in two columns)
- First-stage (excluded IVs) highlights:
  - French legal origin: -0.099 [-1.08]; -0.171 [-2.08]**; -0.050 [-0.47]; -0.121 [-1.18]; -0.013 [-0.1]; -0.063 [-0.57]
  - German legal origin: -0.215 [-2.1]**; -0.154 [-1.37]; -0.212 [-1.91]*; -0.193 [-1.97]**; -0.223 [-2.39]**; -0.192 [-1.63]
  - Scandinavian legal origin: 0.111 [1.32]; 0.132 [1.51]; 0.145 [1.37]; 0.119 [1.48]; 0.136 [1.59]; 0.143 [1.42]
  - Socialist legal origin: -0.143 [-0.96]; -0.232 [-1.64]*; -0.107 [-0.64]; -0.230 [-1.69]*; -0.191 [-1.34]; -0.124 [-0.76]
  - Partial R-squared (excluded IVs): 0.14; 0.17; 0.11; 0.1635; 0.14; 0.12
  - F statistic (excluded IVs): 22.67; 21.53; 19.34; 15.59; 13.36; 21.45 (p value 0 for all)
- Model diagnostics:
  - Observations: 203; 203; 181; 203; 181; 190 (across columns)
  - R-squared: 0.360; 0.470; 0.200; 0.460; 0.220; 0.340
  - Hansen J test statistics and p values: 1.260 (p value 0.740); 3.150 (p value 0.370); 2.060 (p value 0.560); 4.360 (p value 0.230); 1.410 (p value 0.700); 0.660 (p value 0.880)
  - 95 percent confidence interval CLR reported in bracketed lines for columns (noted as robust to weak instruments, Moreira, 2003)

### Bank Z-Scores and BCP Compliance (Table 10)
- Dependent variable: Bank Z-scores (relationship with BCP compliance and chapters)
- Selected coefficients and t-statistics (columns vary):
  - Foreign owned: -0.057 [0.20]; -0.013 [0.05]; -0.103 [0.36]; -0.157 [0.49]; -0.027 [0.10]; -0.041 [0.15]; -0.072 [0.26]; -0.142 [0.48]; -0.122 [0.36]; -0.129 [0.42]; -0.095 [0.33]
  - State owned: 0.039 [0.19]; 0.027 [0.13]; 0.096 [0.42]; 0.043 [0.19]; -0.023 [0.12]; -0.066 [0.35]; 0.141 [0.61]; 0.142 [0.59]; 0.016 [0.07]; -0.007 [0.03]; -0.083 [0.43]
  - Non commercial bank: 0.161 [0.65]; 0.112 [0.45]; 0.143 [0.56]; 0.064 [0.30]; 0.188 [0.86]; 0.324 [1.45]; 0.098 [0.41]; 0.121 [0.52]; 0.062 [0.29]; 0.107 [0.56]; 0.346 [1.52]
  - Total assets: 0.064 [1.28]; 0.073 [1.94]*; 0.1 [2.56]**; 0.095 [1.34]; 0.064 [1.61]; 0.088 [2.53]**; 0.106 [3.24]***; 0.1 [2.62]**; 0.089 [2.66]**; 0.082 [2.24]**; 0.081 [2.02]*
  - Overheads/Total assets: -10.245 [2.20]**; -9.214 [1.88]*; -9.171 [1.85]*; -10.36 [1.96]*; -9.357 [1.92]*; -9.261 [1.87]*; -7.603 [1.38]; -6.454 [1.11]; -10.344 [2.11]**; -9.903 [2.05]**; -8.275 [1.60]
  - Index of rule of law: -0.143 [0.88]; -0.073 [0.44]; -0.031 [0.22]; -0.03 [0.20]; -0.275 [1.59]; -0.154 [1.20]; 0.005 [0.03]; 0.045 [0.31]; -0.039 [0.26]; -0.147 [0.93]; -0.14 [1.16]
  - Compliance with BCPs: 0.02 [1.48] (reported in one column)
  - Index chapter 1: 1.65 [2.08]** (index reported in one column)
  - Index chapter 2: 0.796 [0.66] (reported in one column)
  - Index chapter 3: 0.169 [0.14] (reported in one column)
  - Index chapter 4: 2.137 [2.63]**; 1.332 [1.53] (appear in different columns)
  - Index chapter 5: 2.014 [3.58]***; 1.979 [3.66]*** (appear in different columns)
  - Index chapter 6: 0.108 [0.19] (reported in one column)
  - Index chapter 7: 0.066 [0.12] (reported in one column)
  - Compliance, excl. chapter 1: -0.158 [0.12] (reported in one column)
  - Compliance, excl. chapter 4: -0.43 [0.48] (reported in one column)
  - Compliance, excl. chapter 5: 0.192 [0.21] (reported in one column)
- Observations and model fit (selected):
  - Observations: 160; 160; 160; 146; 160; 160; 160; 155; 146; 146; 155 (across columns)
  - R-squared: 0.16; 0.18; 0.13; 0.14; 0.19; 0.23; 0.12; 0.12; 0.14; 0.15; 0.23
- Notes: Robust t statistics in brackets. * significant at 10%; ** significant at 5%; *** significant at 1%.

### Compliance With the BCPs — Figures (Figures 1 and 2)
- Figure 1: Compliance With the BCPs (by region)
  - Aggregate Index illustrated across regions: Transition countries; Latin America; Middle East and North Africa; South Asia; Sub-Saharan Africa; East Asia and Pacific; Industrialized countries
  - Plot elements: Mean, Minimum, Maximum; axis range 0 to 1
- Figure 2: Average Compliance With the BCPs (by chapter)
  - Chapters listed: Preconditions; Effective supervision; Licensing and structure; Prudential regulations and requirements; Methods of on-going supervision; Information requirements; Formal powers of supervisors; Cross-border banking
  - Plot elements: Mean, Minimum, Maximum; axis range 0 to 1

*Italic: Source document: _wp06242 - chapter 5*

### Appendix I.  Basel Core Principles—Information Requirements of

### Appendix I.  Basel Core Principles—Information Requirements of Banking Organizations

### Principle 21 — Records, Reporting, and Reliability
- Banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business, and that the bank publishes on a regular basis financial statements that fairly reflect its condition.
- Supervisors require regular financial information for effective off-site supervision and evaluation of the local banking market; this information must be verified periodically through on-site examinations or external audits.
- Accounts must portray a true and fair view:
  - Assets must be recorded at values that are realistic and consistent, taking account of current values, where relevant.
  - Profit should reflect what, on a net basis, is likely to be received and take into account likely transfers to loan loss reserves.
- Reporting formats should enable comparisons among banks; internal management information systems may be useful for certain purposes.
- Minimum periodic reporting should include:
  - a bank's balance sheet,
  - contingent liabilities,
  - income statement,
  - supporting details and key risk exposures.
- Deliberately or recklessly false or materially misleading information provided by a bank to supervisors should trigger supervisory and/or criminal action against both the individuals involved and the institution.

### 1. Accounting standards
- Supervisory agencies must provide report instructions that clearly establish the accounting standards to be used in preparing reports.
- These standards should be based on accounting principles and rules that command wide international acceptance and be aimed specifically at banking institutions.

### 2. Scope and frequency of reporting
- Supervisory agencies need powers to determine the scope and frequency of reporting to reflect business volatility and to track banks on a solo and consolidated basis and the banking system as a whole.
- Supervisors should develop a series of informational reports for banks to prepare and submit at regular intervals:
  - Some reports may be filed monthly, others quarterly or annually.
  - Some reports may be "event generated" (filed only if a particular event occurs, e.g., investment in a new affiliate).
- Supervisors should be sensitive to reporting burden; not every bank needs to file every report. Filing status can be based on organizational structure, size, and types of activities.

### 3. Confirmation of the accuracy of information submitted
- Bank management is responsible for the accuracy, completeness and timeliness of prudential, financial, and other reports submitted to supervisors.
- Reports must be verified and external auditors must determine that reporting systems are adequate and provide reliable data.
- External auditors should express an opinion on the annual accounts and management report supplied to shareholders and the general public.
- Where auditing standards are weak, supervisors may need to establish clear guidelines on audit program scope and standards.
- If supervisors cannot be satisfied with the quality of annual accounts, regulatory reports, or auditors' work, they should have powers to require timely corrective action and may reserve the right to approve the issue of accounts to the public.
- In assessing auditors' work, supervisors should consider the audit program's examination of:
  - the loan portfolio,
  - loan loss reserves,
  - nonperforming assets (including treatment of interest on such assets),
  - asset valuations,
  - trading and other securities activities,
  - derivatives,
  - asset securitizations,
  - adequacy of internal controls over financial reporting.
- Internal audits, when competent and independent of management, can be relied upon as a source of information and aid supervisors' understanding.

### 4. Confidentiality of supervisory information
- Certain types of sensitive information should be held confidential by banking supervisors.
- To develop mutual trust, banks need assurance that sensitive information will be held confidential by the banking supervisory agency and appropriate counterparts at other domestic and foreign supervisory agencies.

### 5. Disclosure
- Market participants need access to correct and timely information for market forces to work effectively and foster a stable and efficient financial system.
- Banks should be required to disclose to the public information regarding their activities and financial position that is comprehensive and not misleading.
- Disclosure information should be timely and sufficient for market participants to assess the risk inherent in any individual banking organization.

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### Appendix II. Variable, Definitions, and Source Task
- Variable: ROAE
  - Definition: Return over average equity
  - Source: Bankscope
- Variable: ROAA
  - Definition: Return over average assets
  - Source: Bankscope
- Variable: NLTA
  - Definition: Net loans, in percent of total assets
  - Source: Bankscope
- Variable: LogTA
  - Definition: Log of total bank assets
  - Source: Bankscope
- Variable: ETA
  - Definition: Equity in percent of total assets
  - Source: Bankscope
- Variable: LA
  - Definition: Liquid assets/customer and short-term funding
  - Source: Bankscope
- Variable: Index of rule of law
  - Definition: Average 1996-2002 of index of rule of law
  - Source: Kaufman, Kraay, and Mastruzzi (2003)
- Variable: Depreciation
  - Definition: Average annual depreciation of the nominal exchange over the previous 5 years
  - Source: IMF, International Financial Statistics
- Variable: Index of sovereign rating
  - Definition: S&P sovereign rating
  - Source: S&P
- Variable: Inflation
  - Definition: Average annual inflation rate over the previous 5 years
  - Source: IMF, International Financial Statistics
- Variable: Real credit growth
  - Definition: Average annual real credit growth over the previous 5 years
  - Source: IMF, International Financial Statistics
- Variable: Standard deviation of inflation
  - Definition: Standard deviation of inflation over the previous 5 years
  - Source: IMF, International Financial Statistics
- Variable: Real GDP per capita growth
  - Definition: Average annual real GDP per capita growth over the previous 5 years
  - Source: IMF, International Financial Statistics
- Variable: Standard deviation of growth
  - Definition: Standard deviation of growth over the previous 5 years
  - Source: IMF, International Financial Statistics
- Variable: Index of discipline (BCL)
  - Definition: Index of discipline
  - Source: Barth, Caprio, and Levine (2001)
- Variable: Index of disclosure (BCL)
  - Definition: Index of information disclosure (Barth, Caprio, and Levine, (2003)
  - Source: Barth, Caprio, and Levine (2001)
- Variable: Index auditing requirements (BCL)
  - Definition: Index of auditing requirements (Barth, Caprio, and Levine, (2003)
  - Source: Barth, Caprio, and Levine (2001)
- Variable: Index lack restrictions (Caprio et al.)
  - Definition: Index of (lack of) overall restrictions (Barth, Caprio, and Levine, (2003)
  - Source: Barth, Caprio, and Levine (2001)
- Variable: Index frequency SDDS
  - Definition: Index of frequency of data release - IMF Special Data Dissemination Standards
  - Source: Allum and Agca (2001)
- Variable: Index timeliness SDDS
  - Definition: Index of timeliness of data release - IMF Special Data Dissemination Standards
  - Source: Allum and Agca (2001)
- Variable: Foreign owned
  - Definition: Dummy variable for foreign-owned banks
  - Source: Bankscope
- Variable: State owned
  - Definition: Dummy variable for state-owned banks
  - Source: Bankscope
- Variable: English legal origin
  - Definition: Dummy for English legal origin
  - Source: La Porta and others, 2002
- Variable: French legal origin
  - Definition: Dummy for French legal origin
  - Source: La Porta and others, 2002
- Variable: German legal origin
  - Definition: Dummy for German legal origin
  - Source: La Porta and others, 2002
- Variable: Scandinavian legal origin
  - Definition: Dummy for Scandinavian legal origin
  - Source: La Porta and others, 2002
- Variable: Socialist legal origin
  - Definition: Dummy for Socialist legal origin (La Porta and others, 2002)
  - Source: La Porta and others, 2002

*Appendix I and Appendix II from _wp06242 - Appendix I.  Basel Core Principles—Information Requirements of Banking Organizations*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp06242.pdf_