IMF Working Papers

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

Author/Editor:

Enrica Detragiache ; Thierry Tressel ; Asli Demirgüç-Kunt

Publication Date:

October 1, 2006

Electronic Access:

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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.

Series:

Working Paper No. 2006/242

Subject:

Bank regulation Bank soundness Bank supervision Banking Basel Core Principles