Better Regulation Fails To Strengthen Banks
By Arnold Kling
That is the conclusion of Asli Demirgüç-Kunt and Enrica Detragiache, two economists with the International Monetary Fund.
All in all, we do not find support for the hypothesis that better compliance with BCPs [Basel Core Principles] results in sounder banks as measured by Z-scores [the number of standard deviations by which bank returns have to fall to wipe out bank equity]. This result holds after controlling for the macroeconomic environment, institutional quality, and bank characteristics. We also fail to find a significant relationship when we consider different samples, such a sample of rated banks only, a sample including only commercial banks, and samples including only the largest financial institutions. In an additional test, we calculate aggregate Z-scores at the country level to try to capture the stability of the system as a while rather than that of individual banks, but also this measure of soundness is not significantly related to overall BCP compliance.
Thanks to a pointer from Olaf Storbeck, recommended by a Tim Harford tweet.
This is an unusual sort of paper, in that it tries to look for evidence that regulation works. Ordinarily, economists proceed directly from the observation that market results are imperfect to the conclusion that regulation is the solution. Faith-based regulation, as opposed to evidence-based regulation.