Does Regulatory Governance Matter for Financial System Stability? An Empirical Analysis

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.This paper provides empirical evidence that the quality of regulatory governancegovernance practices adopted by financial system regulators and supervisors-matters for financial system soundness. The paper constructs indices of financial system soundness and regulatory governance, based on country data collected from the Financial Sector Assessment Program (FSAP). Regression results indicate that regulatory governance has a significant influence on financial system soundness, along with variables reflecting macroeconomic conditions, the structure of the banking system, and the quality of political institutions and public sector governance. The results also indicate that good public sector governance amplifies the impact of regulatory governance on financial system soundness. JEL Classification Numbers: 017, P16, G28, G21, D78

Financial Fragility of Banks In Vietnam: The Role of Revenue Diversification and National Governance Quality

“…As a consequence, it can be concluded that in general, a development in national governance quality will lead to a decrease in banks fragility, the result of which is also relevant to the second hypothesis. The result of this research is also consistent with Das, Quintyn and Chenard [66] suggesting that the higher quality in governance, the higher stability that banks can achieve. The finding additionally aligns with those of Ngobo and Fouda [67] which is presented in the banking literatures that there is a positive relations between national governance quality and banks stability.…”

Does Compliance with Basel Core Principles Bring Any Measurable Benefits?

“…Recent work includes papers by Christofides, Mulder, and Tiffin (2003), who studied the impact of the observance of a variety of standards on spreads and ratings; Das, Quintyn, and Chenard (2004), who explored the link between financial sector soundness and regulatory governance; and Glennerster and Shin (2003), who focused on the effects of transparency on borrowing costs.…”

A structural approach to financial stability: On the beneficial role of regulatory governance

“…Recent research asserting the positive influence of regulatory governance on financial stability includes Beck et al (2003), Das et al (2004), and Ponce (2009). Beck et al (2003) investigate the impact of various regulatory policies on the integrity of bank lending.…”

“…The results of their ordered probit regression show that a higher degree of regulatory independence seems to reduce the likelihood that politicians or the financial industry will capture the agency. Das et al (2004) construct an index of regulatory governance based on the IMF's Financial Sector Assessment Program (FSAP). Banking sector stability is proxied by an index consisting of a weighted average of the capital adequacy ratio and the ratio of non-performing loans.…”

“…In the literature it is claimed that good regulatory governance enhances the ability of the financial system to withstand unsound market practices and occurrences of moral hazard, and thus improves system-wide risk-management capabilities, whereas dysfunctional government arrangements are supposed to undermine the credibility of the regulatory authority and can lead to the spread of unsound practices, jeopardizing the stability of the financial system (Das et al, 2004). Quintyn (2007) argues that weak regulatory governance promotes weak financial sector governance in general, which in turn impairs the smooth functioning of the financial system, curbing economic performance and growth.…”