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

Bermpei, Theodora and 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. ISSN 1057-5219

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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.

Item Type: Article
Uncontrolled Keywords: Bank stability, Bank regulation and supervision, Institutional quality, Emerging and developing economies
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 22 Jun 2018 10:27
Last Modified: 22 Jun 2018 11:15
URI: http://repository.essex.ac.uk/id/eprint/22302

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