1. 13th Dubrovnik Economic Conference Discussion - Paul Wachtel
Bank Regulation is Changing: But for Better or Worse
James R. Barth, Gerard Caprio, Ross Levine

2. 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

3. 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

4. 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?

5. 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.

6. 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?

7. 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?

8. 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).

9. 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….

10. 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.

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