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Does institutional quality condition the effect of bank regulations and supervision on bank stability?: Evidence from emerging and developing economies

Does institutional quality condition the effect of bank regulations and supervision on bank stability?: Evidence from emerging and developing economies
Does institutional quality condition the effect of bank regulations and supervision on bank stability?: Evidence from emerging and developing economies

Does institutional quality enhance or weaken the effect of bank regulations and supervision on bank stability? We use a sample of around 1050 commercial banks from 69 emerging and developing economies over the 2004–2013 period and show that the answer to this question depends on the type of institutional quality and on the type of bank regulation. Political stability strengthens the positive effect of capital regulation and activities restrictions on bank stability as measured by the z-score. Control of corruption also enhances the positive effect of activities restrictions on stability. On the other hand, the positive effect of capital regulation and private monitoring on stability subdues when good quality institutions that induce loan repayment, such as strong creditor rights and the rule of law, are present. Finally, we do not find strong evidence that the negative effect of supervisory power on bank stability is conditioned by institutional quality. In further analysis, we disaggregate the z-score measure and find that institutional quality conditions the effect of bank regulations on stability more by affecting profit stability and profitability rather than by influencing capitalisation. These findings could be useful for bank regulators in emerging and developing economies in the light of the implementation of the Basel III accord.

Bank regulation and supervision, Bank stability, Emerging and developing economies, Institutional quality
1057-5219
Bermpei, Theodora
9549be8f-7acb-4f52-a237-3a093b9bb584
Kalyvas, Antonios
b90c20b2-9fd4-4d5d-a123-34a193e1ca1d
Nguyen, Thanh Cong
20deebe0-cd57-422d-9092-ae6cdf9d1ac3
Bermpei, Theodora
9549be8f-7acb-4f52-a237-3a093b9bb584
Kalyvas, Antonios
b90c20b2-9fd4-4d5d-a123-34a193e1ca1d
Nguyen, Thanh Cong
20deebe0-cd57-422d-9092-ae6cdf9d1ac3

Bermpei, Theodora, Kalyvas, Antonios and Nguyen, Thanh Cong (2018) Does institutional quality condition the effect of bank regulations and supervision on bank stability?: Evidence from emerging and developing economies. International Review of Financial Analysis. (doi:10.1016/j.irfa.2018.06.002).

Record type: Article

Abstract

Does institutional quality enhance or weaken the effect of bank regulations and supervision on bank stability? We use a sample of around 1050 commercial banks from 69 emerging and developing economies over the 2004–2013 period and show that the answer to this question depends on the type of institutional quality and on the type of bank regulation. Political stability strengthens the positive effect of capital regulation and activities restrictions on bank stability as measured by the z-score. Control of corruption also enhances the positive effect of activities restrictions on stability. On the other hand, the positive effect of capital regulation and private monitoring on stability subdues when good quality institutions that induce loan repayment, such as strong creditor rights and the rule of law, are present. Finally, we do not find strong evidence that the negative effect of supervisory power on bank stability is conditioned by institutional quality. In further analysis, we disaggregate the z-score measure and find that institutional quality conditions the effect of bank regulations on stability more by affecting profit stability and profitability rather than by influencing capitalisation. These findings could be useful for bank regulators in emerging and developing economies in the light of the implementation of the Basel III accord.

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Accepted/In Press date: 14 June 2018
e-pub ahead of print date: 19 June 2018
Keywords: Bank regulation and supervision, Bank stability, Emerging and developing economies, Institutional quality

Identifiers

Local EPrints ID: 422459
URI: https://eprints.soton.ac.uk/id/eprint/422459
ISSN: 1057-5219
PURE UUID: 6a7c9c55-ce5e-4379-bbdc-2ad4c76e0dae

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Date deposited: 24 Jul 2018 16:30
Last modified: 13 Mar 2019 18:16

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