A Retrospective on Bank Regulation
and Supervision Around the World
James R. Barth
Auburn University and Milken Institute
Penny Prabha
Milken Institute
Capital Flows and Financial Liberalization
Annual CEMP-CIEPS FORUM
March 13, 2014
Arlington, Virginia
1
Motivation: More Frequent (and Severe)
Banking Crises Worldwide
Middle East &
North Africa
Sub-Saharan
Africa
South Asia
East Asia &
Pacific
Latin America &
Caribbean
Europe &
Central Asia
North America
1801
1816
1831
1846
Sources: Reinhart and Rogoff (2008), Milken Institute.
1861
1876
1891
1906
1921
1936
1951
1966
1981
1996
2011
2
Motivation: Frequency of Recent Banking Crises
1970 - 2011
Source: Laeven, Valencia (2012).
3
Motivation: Cost of Banking Crises
2007 - 2011
Country
Start of crisis
Date when
systemic
Austria
Belgium
Denmark
Germany
Greece
Iceland
Ireland
Kazakhstan
Latvia
Luxembourg
Mongolia
Netherlands
Nigeria
Spain
Ukraine
United Kingdom
United States
2008
2008
2008
2008
2008
2008
2008
2008
2008
2008
2008
2008
2009
2008
2008
2007
2007
2008
2008
2009
2009
2009
2008
2009
2010
2008
2008
2009
2008
2011
2011
2009
2008
2008
Source: Laeven, Valencia (2012).
Significant
Extensive
guarantees on
liquidity support
liabilities
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
Significant
restructuring
costs
v
v
v
v
v
v
v
v
v
v
v
v
v
v
Significant asset
Significant
purchases
nationalizations
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
v
4
Motivation: Cost of Banking Crises
Banking Crises Outcomes, 1970-2011
Country
Output Increase in Monetary
loss
debt
expansion
Fiscal costs Duration
Medians
In percent
of financial
system
assets
In percent of GDP
All
Advanced
Emerging
Developing
23.0
32.9
26.0
1.6
Source: Laeven, Valencia (2012).
12.1
21.4
9.1
10.9
1.7
8.3
1.3
1.2
6.8
3.8
10.0
10.0
12.7
2.1
21.4
18.3
In years
2.0
3.0
2.0
1.0
Peak
liquidity
Support
In percent of deposits
and foreign liabilities
20.1
11.5
22.3
22.6
9.6
5.7
11.1
12.3
Peak NPLs
In percent
of total
loans
25.0
4.0
30.0
37.5
5
Motivation: U.S. History of Crises
More Regulators with More Power
Federal
Reserve Act
(1913)
(Bank runs)
Financial
Institutions Reform,
Recovery and
Enforcement Act
(1989)
(S&L crisis)
Depository
Institutions
Deregulation
and Monetary
Control Act
(1980)
(S&L crisis)
1860
1980
1880
1900
1920
National
Bank Act
(1864)
National
Currency Act
(1863)
(Civil
War &
wildcat
banking)
Federal
Deposit
Insurance
Corp. & SEC
(Great
Depression)
1940
2000
1960
Garn -St
Germain
Depository
Institutions Act
(1982)
(S&L crisis)
Federal
Deposit
Insurance
Corporation
Improvement
Act
(1991)
(Banking crisis)
Federal
Housing
Finance
Regulatory
Reform Act
(2008)
2010
Sarbanes
Oxley Act
(2002)
(Enron and
WorldCom
bankruptcies)
Dodd– Frank
Wall Street
Reform and
Consumer
Protection
Act
(2010)
Emergency
Economic
Stabilization
Act
(2008)
6
Bank Regulation and Supervision Matter

Fed Chairman Ben Bernanke said, “stronger regulation and
supervision aimed at problems with underwriting practices
and lenders’ risk management would have been a more
effective and surgical approach to constraining the housing
bubble than a general increase in interest rates.”

Measuring bank regulation and supervision around the world
is hard.

Yet, as Lord Kelvin said, “[I]f you cannot measure it, you
cannot improve it.”
7
Countries Participating in the
World Bank Surveys
8
Countries and Questions in the
World Bank Surveys
Survey I (1999): 118 countries and 180 questions
 Survey II (2003): 151 countries and 275 questions
 Survey III (2006): 143 countries and 300 questions
 Survey IV (2011): 143 countries and 270 questions
 Surveys I-IV: 84 countries

9
Data and Indexes

The dataset includes information on: the organization of
national banking authorities, the details of financial
regulation and supervision, and the size and structure of the
banking systems.

About 50 indexes of policies are constructed to measure:
capital requirements, ownership restrictions, deposit
insurance generosity, allowable activities, among other
regulatory and supervisory policies.
10
Aggregating the Data:
the Art and Science of Forming Indexes
Index
Component
Bank activity regulations
The degree to which national regulatory authorities allow banks to engage in securities, insurance,
real estate activities
Financial conglomerate
The extent to which banks may own and control non-financial firms
Competition regulation
Whether foreign banks may own or compete with domestic banks
Capital regulation
The extent of regulatory requirements regarding the amount of capital banks must hold and
whether the source of funds that count
Official supervisory action
Restructuring authority, insolvency declaration, forbearance
Official supervisory
structure
The degree to which the supervisory authority is independent from political influence, political
lobbying from banks
Private monitoring
Audit, credit rating, explicit deposit insurance scheme, bank accounting
Deposit insurance scheme
Deposit insurance fund authority, size of deposit insurance fund, moral hazard
Market structure
Concentration of deposits and assets in five largest banks, foreign and government banks
External governance
External audits, financial statement transparency, accounting standards
11
Dataset for Surveys I-IV
James Barth

http://business.auburn.edu/~barthjr/Web%20Dataset.htm
Jerry Caprio

http://econ.williams.edu/people/gcaprio
Ross Levine

http://faculty.haas.berkeley.edu/ross_levine/Regulation.htm
12
Bank Assets / GDP Ratio
Highest total bank assets / GDP ratio based on Surveys I-IV
6,500%
3,300%
900%
800%
700%
600%
500%
400%
300%
200%
100%
0%
13
Differences in Total Assets of Big U.S. Banks Due to Differences
in the Accounting Treatment of Derivatives
Q2 2012
US$ billions
4,000
Additional derivatives included in total assets (IFRS)
3,000
1,660
Reported total assets (U.S. GAAP)
1,516
962
2,000
845
1,000
2,290
2,161
69
1,916
14
78
825
749
1,336
949
27
330
0
JP
Morgan
Chase
Bank of Citigroup Goldman
America
Sachs
Wells
Fargo
Metlife
Sources: BankScope, Bloomberg, annual reports, and Milken Institute.
0
353
7
0
300
297
Morgan Bank of
US
PNC
Capital
Stanley New York Bancorp Financial
One
Mellon
3
201
6
178
0
179
1
148
State
Street
SunTrust
BB&T
American
Express
14
Total Bank Assets / GDP
Countries with increasing ratios from Survey I to IV
Tajikistan
Ghana
Peru
Mexico
Guatemala
Botswana
Nigeria
Tonga
Moldova
Gambia
Romania
El Salvador
Nepal
Poland
Russia
India
United States
Brazil
Chile
Korea, Rep.
Mauritius
Kuwait
Thailand
Germany
Vanuatu
South Africa
Slovenia
Israel
Canada
Malaysia
Italy
New Zealand
Greece
Denmark
Venezuela
Portugal
Belgium
France
Spain
Netherlands
Switzerland
United Kingdom
Cyprus
Malta
-100%
Countries with decreasing ratios from Survey I to IV
Argentina
Oman
Jamaica
Morocco
Philippines
Indonesia
Macao, China
Panama
100%
300%
Survey I
500%
700%
Survey IV minus I
900%
-100%
100%
300%
Survey I
500%
700%
900%
Survey I minus IV
15
Percentage of Assets Accounted for by 5 Largest Banks
Countries with increasing ratios from Survey I to IV
Germany
Luxembourg
United States
Panama
Philippines
Argentina
Kyrgyz Republic
Malaysia
Turkey
Spain
Italy
Switzerland
Honduras
Brazil
Kazakhstan
Slovakia
Chile
Croatia
Bosnia and
Herzegovina
Australia
Greece
Gibraltar
Guatemala
Korea, Rep.
Malawi
Denmark
Belarus
El Salvador
Canada
Peru
Belgium
Liechtenstein
Seychelles
Israel
Jamaica
Trinidad and Tobago
Guyana
Lesotho
0%
Countries with decreasing ratios from Survey I to IV
Austria
India
Guernsey
Armenia
Nigeria
Nepal
Poland
Romania
Kenya
Bulgaria
Slovenia
Venezuela
Bangladesh
Moldova
Macao, China
Thailand
China
Puerto Rico
Qatar
Ghana
Russia
Cyprus
Netherlands
Lithuania
Mauritius
New Zealand
Burundi
Estonia
Finland
Malta
Gambia
Botswana
20%
Survey I
40%
60%
80%
Survey IV minus I
100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Survey IV
Survey I minus IV
16
Percentage of Total Bank Assets Government Owned
Countries with increasing ratios from Survey I to IV
South Africa
Denmark
Mauritius
New Zealand
Hungary
Honduras
Macao, China
Peru
Armenia
Cyprus
El Salvador
Guatemala
Panama
Greece
Nigeria
Italy
Bulgaria
Guyana
Finland
Mexico
Slovakia
Korea, Rep.
Bosnia and
Herzegovina
Thailand
Turkey
Croatia
Ghana
Germany
Taiwan
Qatar
Poland
Indonesia
Lithuania
Malawi
Lesotho
Brazil
Jamaica
Bhutan
Burundi
Iceland
Russia
Bangladesh
Romania
Maldives
India
Virgin Islands, British
Kenya
Luxembourg
Guernsey
Botswana
Austria
Moldova
Philippines
Tonga
Vanuatu
Netherlands
Tajikistan
Switzerland
Puerto Rico
Chile
Kyrgyz Republic
Portugal
Kazakhstan
Trinidad and Tobago
Nepal
United Kingdom
Liechtenstein
Venezuela
Argentina
Slovenia
Sri Lanka
Belarus
0%
Countries with decreasing ratios from Survey I to IV
20%
Survey I
40%
60%
Survey IV minus I
80%
0%
10%
20%
30%
Survey IV
40%
50%
60%
70%
80%
Survey I minus IV
17
Percentage of Total Bank Assets Foreign Owned
Countries with increasing ratios from Survey I to IV
Liechtenstein
Nigeria
Tajikistan
Bangladesh
India
Guatemala
Germany
Switzerland
Burundi
Turkey
Kazakhstan
Brazil
Austria
Italy
Russia
Greece
Malaysia
Portugal
Belarus
Slovenia
Malawi
Indonesia
Cyprus
Chile
Moldova
Kyrgyz Republic
Trinidad and Tobago
Peru
Honduras
Guyana
Maldives
Poland
Panama
Armenia
Mauritius
Seychelles
Singapore
Finland
Korea, Rep.
Gambia
Bulgaria
Hungary
Romania
Mexico
Malta
Croatia
Bosnia and Herzegovina
El Salvador
Slovakia
Jamaica
Lesotho
Estonia
Macao, China
Cayman Islands
Countries with decreasing ratios from Survey I to IV
Thailand
Spain
Philippines
Qatar
Australia
Bhutan
Puerto Rico
Venezuela
Nepal
Argentina
Ghana
Luxembourg
Botswana
New Zealand
Gibraltar
Tonga
Guernsey
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Survey I
Survey IV minus I
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Survey IV
Survey I minus IV
18
Regulatory Restrictions on Bank Activities
and the Mixing of Banking and Commerce
Percentage distribution of 126 countries in Survey I and 124 countries in Survey IV by restrictiveness
Nonfinancial firm
ownership of
banks
Bank ownership
of nonfinancial
firms
Unrestricted
40
IV
18
Insurance
IV
20
Securities
29
48
34
49
27
40
30
58
0%
42
68
IV
20%
19
43
62
10%
8
38
40
7
1
59
47
10
I
4
40
24
19
I
44
45
15
IV
Prohibited
67
14
IV
Restricted
38
16
I
I
Real estate
Permitted
19
39
30%
40%
50%
60%
14
70%
80%
90%
6
9
100%
19
New Survey IV Information: Bank Supervisory
Criteria for Assessing Systemic Risk
Number of Countries Reporting Yes for Each Factor
Bank capital ratios
113
Bank liquidity ratios
104
Sectoral composition of bank loan portfolios
101
Growth in bank credit
100
Bank non-performing loan ratios
99
Bank profitability ratios
93
Bank provisioning ratios
92
Bank leverage ratios
84
FX position of banks
79
Housing prices
48
Stock market prices
46
0
20
40
60
80
100
120
20
0%
Guyana
Brazil
United States
Israel
Argentina
Ethiopia
Jordan
Morocco
Sri Lanka
Uruguay
Belgium
Jamaica
Seychelles
Guatemala
Bhutan
India
Malawi
New Zealand
Panama
Philippines
Spain
Tanzania
Uganda
Cook Islands
Mexico
South Africa
Samoa (Western)
Austria
Dominican Republic
El Salvador
Honduras
Lesotho
Maldives
Syria
Trinidad and Tobago
Zimbabwe
Greece
Gibraltar
Armenia
Egypt
Slovenia
Turkey
Poland
Iceland
Singapore
Germany
Latvia
Lithuania
Palestinian Territory
Liechtenstein
Bulgaria
Isle of Man
Kyrgyz Republic
Serbia
Belize
Estonia
Virgin Islands, British
New Survey IV Information: Statutory Corporate
Tax Rate on Domestic Bank Income
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
21
Convergence

We attempt to assess whether bank regulatory and
supervisory practices have converged across countries.

One way to do so is to calculate the normalized standard
deviation in Survey I and Survey IV for each index.

Another way is to assess the number of countries that are
x% different from the median value, where x equals 10%,
25%, 30%, and 50%.
22
Was There a Convergence or Divergence in Regulation and
Supervision Overtime? (Number of Countries with Index Values
Different From the Median by At Least 10, 25, 30 or 50 Percent)
Normalized
Standard
Deviation
Median
Total
number of
countries
Range
Overall
restrictions on bank
activities
105
Entry into
Banking
Requirements
Survey
I
Survey
IV
3—12
7
7
135
0—8
8
Bank capital regulations
108
0—10
Official
supervisory powers
132
Private monitoring
External governance
Survey
I
Survey
IV
10%
25%
30%
50%
Survey
I
Survey
IV
Survey
I
Survey
IV
Survey
I
Survey
IV
Survey
I
Survey
IV
0.3029 0.2851
84
90
53
51
34
25
13
7
8
0.1305 0.0591
37
20
4
1
4
1
2
0
6
7
0.3051 0.2346
90
81
51
41
43
13
2
3
0—14
11
11
0.2235
65
58
36
28
7
16
4
1
92
0—12
8
8
0.1824 0.1843
68
63
4
8
4
7
1
0
33
0—19
12
15
0.1716 0.1073
11
11
3
0
3
0
0
0
0.22
23
24