13th Dubrovnik Economic Conference Discussion - Paul Wachtel Bank Regulation is Changing: But for Better or Worse James R. Barth, Gerard Caprio, Ross Levine

IFIs and Financial Structure Prior to mid 1990s the IFIs focused on macroeconomics and development Finance came to the fore Levine’s research program Caprio’s research group at World Bank Financial crises forced issue Followed by law-finance literatures Emphasis on legal institutions, governance

Bank regulation and supervision World Bank surveys were logical consequence Three waves – 1998/00, 2002 and 2005 Extensive data on bank regulation, supervision – policies, structures, compliance Challenge of this paper – quantify and aggregate data so that extensive survey information is informative. Opportunity to examine cross country differences as well as changes

Surprising observations Changes around the world in last decade; age of ‘liberalization’ very uneven More entry restrictions common Strengthening of Basle pillars  more regulatory activity Is this real? Or just appearances? Do they actually reduce probability of failure or crisis? Do they effect intermediation process?

Great data Extensive information Publicly available There for all to see – Needs no discussant But, it is not so easy to interpret – that is the challenge.

Does good regulation matter? I Logit regression to explain probability of crisis “restricting bank activities increases bank fragility” Is this association or causality? New survey shows a tendency towards increased activity restriction Should we be forecasting an increase in crises in future?

Does good regulation matter? II Logit regression with firm level data on corruption of bankers Increased supervisory powers are associated with more corruption. Basel II is leading to an increase in the powers of supervisors and a concentrations of regulatory authority Will Basel II result in more corruption?

Does good regulation matter? III Financial deepening (credit/GDP)  growth Does good regulation  deepening? Entry, capital regulation, supervisory powers do not matter However, improved private monitoring does lead to financial deepening. It is also associated with better performance (efficiency).

Is Basle being oversold? Data challenges our expectations – we would like to see that improvements in regulation lead to ‘good’ outcomes. Simulations suggest that changes in regulation are not uniformly beneficial. Perhaps regulation and supervision do not matter that much. BUT….

There is more to the story… Initial conditions matter Which countries, with which initial conditions initiate reforms? The effects of change depend on initial conditions.

What’s ahead? Great data Lot’s of stories to be told. Start of serious and important quantitative research agenda on regulation.