1

A Retrospective on Bank Regulation and Supervision

Around the World

James R. Barth Penny Prabha Auburn University and Milken Institute Milken Institute

Capital Flows and Financial Liberalization Annual CEMP-CIEPS FORUM

March 13, 2014Arlington, Virginia

2

Motivation: More Frequent (and Severe) Banking Crises

Worldwide

1801 1816 1831 1846 1861 1876 1891 1906 1921 1936 1951 1966 1981 1996 2011

Middle East & North Africa

Sub-Saharan Africa

South Asia

East Asia & Pacific

Latin America & Caribbean

Europe & Central Asia

North America

Sources: Reinhart and Rogoff (2008), Milken Institute.

3

Motivation: Frequency of Recent Banking Crises

1970 - 2011

Source: Laeven, Valencia (2012).

4

Motivation: Cost of Banking Crises

2007 - 2011

Source: Laeven, Valencia (2012).

Country Start of crisisDate when systemic

Extensive liquidity support

Significant guarantees on

liabilities

Significant restructuring

costs

Significant asset

purchases

Significant nationalizatio

nsAustria 2008 2008 v v v   vBelgium 2008 2008 v v v   vDenmark 2008 2009 v v     vGermany 2008 2009 v v     vGreece 2008 2009 v v v    Iceland 2008 2008 v v v   vIreland 2008 2009 v v v v v

Kazakhstan 2008 2010 v   v   vLatvia 2008 2008 v v     v

Luxembourg 2008 2008 v v v   vMongolia 2008 2009 v v v   v

Netherlands 2008 2008 v v v   vNigeria 2009 2011 v v v v vSpain 2008 2011 v v v    

Ukraine 2008 2009 v   v   vUnited

Kingdom2007 2008 v v v v v

United States 2007 2008 v v v v v

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Motivation: Cost of Banking Crises

Banking Crises Outcomes, 1970-2011

Source: Laeven, Valencia (2012).

CountryOutput

lossIncrease in debt

Monetary expansio

n

Fiscal costs

DurationPeak

liquiditySupport

Peak NPLs

Medians

In percent of GDP

In percent

of financial system assets

In yearsIn percent of deposits and

foreign liabilities

In percent of total loans

All 23.0 12.1 1.7 6.8 12.7 2.0 20.1 9.6 25.0Advanced 32.9 21.4 8.3 3.8 2.1 3.0 11.5 5.7 4.0Emerging 26.0 9.1 1.3 10.0 21.4 2.0 22.3 11.1 30.0Developing

1.6 10.9 1.2 10.0 18.3 1.0 22.6 12.3 37.5

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Motivation: U.S. History of Crises

More Regulators with More Power

2010

Federal Housing Finance

Regulatory Reform Act

(2008)

National Currency Act

(1863)

1860

1880 1900 1920 1940 1960

1980 2000

Federal Deposit

Insurance Corporation

Improvement Act

(1991)(Banking crisis)

Federal Reserve Act

(1913)(Bank runs)

Depository Institutions

Deregulation and Monetary

Control Act (1980)

(S&L crisis)

National Bank Act

(1864)Garn -St Germain

Depository Institutions Act

(1982)(S&L crisis)

Federal Deposit

Insurance Corp. & SEC

(Great Depression)

Financial Institutions Reform,

Recovery and Enforcement Act

(1989) (S&L crisis)

(Civil War &

wildcat banking)

SarbanesOxley Act

(2002)(Enron and WorldCom

bankruptcies)

Emergency Economic

StabilizationAct

(2008)

Dodd–Frank Wall Street

Reform and Consumer Protection

Act(2010)

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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.”

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Countries Participating in the World Bank Surveys

9

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

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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.

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Aggregating the Data: the Art and Science of Forming

IndexesIndex 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

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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

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Bank Assets / GDP Ratio

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

6,500%3,300%

Highest total bank assets / GDP ratio based on Surveys I-IV

14

Differences in Total Assets of Big U.S. Banks Due to Differences in the Accounting

Treatment of Derivatives Q2 2012

Sources: BankScope, Bloomberg, annual reports, and Milken Institute.

JP Morgan Chase

Bank of America

Citigroup Goldman Sachs

Wells Fargo

Metlife Morgan Stanley

Bank of New York Mellon

US Ban-corp

PNC Finan-cial

Capital One

State Street

SunTrust BB&T American Express

0

1,000

2,000

3,000

4,000

2,290 2,1611,916

9491,336

825 749330 353 300 297 201 178 179 148

1,6601,516

962

84569

14 78

27 0 7 03 6 0 1

Additional derivatives included in total assets (IFRS)

Reported total assets (U.S. GAAP)

US$ billions

15

Total Bank Assets / GDP

-100% 100% 300% 500% 700% 900%

MaltaCyprus

United KingdomSwitzerlandNetherlands

SpainFrance

BelgiumPortugalVenezuelaDenmark

GreeceNew Zealand

ItalyMalaysia

CanadaIsrael

SloveniaSouth Africa

VanuatuGermanyThailand

KuwaitMauritius

Korea, Rep.ChileBrazil

United StatesIndia

RussiaPoland

NepalEl Salvador

RomaniaGambia

MoldovaTonga

NigeriaBotswana

GuatemalaMexico

PeruGhana

Tajikistan

Survey I Survey IV minus I

Countries with increasing ratios from Survey I to IV

0% 100% 200% 300% 400% 500% 600% 700% 800% 900%

Panama

Macao, China

Indonesia

Philippines

Morocco

Jamaica

Oman

Argentina

Survey I Survey I minus IV

Countries with decreasing ratios from Survey I to IV

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Percentage of Assets Accounted for by 5 Largest Banks

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

LesothoGuyana

Trinidad and TobagoJamaica

IsraelSeychelles

LiechtensteinBelgium

PeruCanada

El SalvadorBelarus

DenmarkMalawi

Korea, Rep.Guatemala

GibraltarGreece

AustraliaBosnia and Herzegovina

CroatiaChile

SlovakiaKazakhstan

BrazilHonduras

SwitzerlandItaly

SpainTurkey

MalaysiaKyrgyz Republic

ArgentinaPhilippines

PanamaUnited StatesLuxembourg

Germany

Countries with increasing ratios from Survey I to IV

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

BotswanaGambia

MaltaFinlandEstoniaBurundi

New ZealandMauritiusLithuania

NetherlandsCyprusRussiaGhanaQatar

Puerto RicoChina

ThailandMacao, China

MoldovaBangladeshVenezuela

SloveniaBulgaria

KenyaRomania

PolandNepal

NigeriaArmeniaGuernsey

IndiaAustria

Countries with decreasing ratios from Survey I to IV

17

Percentage of Total Bank Assets Government Owned

0% 10% 20% 30% 40% 50% 60% 70% 80%

Belarus

Sri Lanka

Slovenia

Argentina

Venezuela

Liechtenstein

United Kingdom

Nepal

Trinidad and Tobago

Kazakhstan

Portugal

Kyrgyz Republic

Chile

Puerto Rico

Switzerland

Tajikistan

Netherlands

Vanuatu

Tonga

Philippines

Moldova

Austria

Botswana

Guernsey

Luxembourg

KenyaVirgin Islands, British

Hungary

New Zealand

Mauritius

Denmark

South Africa

Survey I Survey IV minus I

Countries with increasing ratios from Survey I to IV

0% 10% 20% 30% 40% 50% 60% 70% 80%

IndiaMaldivesRomania

BangladeshRussia

IcelandBurundiBhutanJamaica

BrazilLesothoMalawi

LithuaniaIndonesia

PolandQatar

TaiwanGermany

GhanaCroatiaTurkey

ThailandBosnia and Herzegovina

Korea, Rep.SlovakiaMexicoFinlandGuyana

BulgariaItaly

NigeriaGreece

PanamaGuatemala

El SalvadorCyprus

ArmeniaPeru

Macao, ChinaHonduras

Survey IV Survey I minus IV

Countries with decreasing ratios from Survey I to IV

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Percentage of Total Bank Assets Foreign Owned

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cayman IslandsMacao, China

EstoniaLesothoJamaicaSlovakia

El SalvadorBosnia and Herz egovina

CroatiaMalta

MexicoRomaniaHungaryBulgariaGambia

Korea, Rep.Finland

SingaporeSeychellesMauritiusArmeniaPanama

PolandMaldivesGuyana

HondurasPeru

Trinidad and TobagoKyrgyz Republic

MoldovaChile

CyprusIndonesia

MalawiSloveniaBelarus

PortugalMalaysia

GreeceRussia

ItalyAustria

Braz ilKaz akhstan

TurkeyBurundi

Switz erlandGermany

GuatemalaIndia

BangladeshTajikistan

NigeriaLiechtenstein

Survey I Survey IV minus I

Countries with increasing ratios from Survey I to IV

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Guernsey

Tonga

Gibraltar

New Zealand

Botswana

Luxembourg

Ghana

Argentina

Nepal

Venezuela

Puerto Rico

Bhutan

Australia

Qatar

Philippines

Spain

Thailand

Survey IV Survey I minus IV

Countries with decreasing ratios from Survey I to IV

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Regulatory Restrictions on Bank Activities and the Mixing of

Banking and Commerce

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

62

58

7

10

19

18

15

14

16

40

39

43

68

49

29

20

24

45

67

38

14

19

30

27

34

40

47

59

40

44

9

6

19

40

42

48

38

8

1

4

Unrestricted Permitted Restricted ProhibitedNonfinancial firm ownership of banks

Bank ownership of nonfinancial firms

Real estate

Insurance

Securities

I

IV

I

IV

I

IV

I

IV

IV

Percentage distribution of 126 countries in Survey I and 124 countries in Survey IV by restrictiveness

20

New Survey IV Information: Bank Supervisory Criteria for Assessing

Systemic Risk Number of Countries Reporting Yes for Each

Factor

Stock market prices

Housing prices

FX position of banks

Bank leverage ratios

Bank provisioning ratios

Bank profitability ratios

Bank non-performing loan ratios

Growth in bank credit

Sectoral composition of bank loan portfolios

Bank liquidity ratios

Bank capital ratios

0 20 40 60 80 100 120

46

48

79

84

92

93

99

100

101

104

113

21

New Survey IV Information: Statutory Corporate Tax Rate on

Domestic Bank Income

Guyana Ethiopia Belgium India Spain South Africa Honduras Zimbabwe Slovenia Germany Bulgaria Estonia

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

22

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%.

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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) 

Total number of countries

Range

MedianNormalizedStandardDeviation

10% 25% 30% 50%

SurveyI

SurveyIV

SurveyI

SurveyIV

SurveyI

SurveyIV

SurveyI

SurveyIV

SurveyI

SurveyIV

SurveyI

SurveyIV

Overallrestrictions on bank

activities105 3—12 7 7 0.3029 0.2851 84 90 53 51 34 25 13 7

Entry intoBanking

Requirements135 0—8 8 8 0.1305 0.0591 37 20 4 1 4 1 2 0

Bank capital regulations

108 0—10 6 7 0.3051 0.2346 90 81 51 41 43 13 2 3

Officialsupervisory powers

132 0—14 11 11 0.2235 0.22 65 58 36 28 7 16 4 1

Private monitoring 92 0—12 8 8 0.1824 0.1843 68 63 4 8 4 7 1 0

External governance

33 0—19 12 15 0.1716 0.1073 11 11 3 0 3 0 0 0

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