Table 3 presents regressions on the relationship between government integrity and the regulation and supervision of banks while controlling for ethnic diversity and religious composition. The dependent variable in all the regressions is an index of government integrity, with bigger values signifying less corruption.1<sup>4</sup> To measure ethnic diversity, we use Easterly and Levine's (1997) measure of ethnolinguistic fractionalization. It measures the probability that two randoml) selected people from a given country will not belong to the same ethnolinguistic group. To measure religious composition, we use LLSV's (1999) measure of the percentage of the population in each country that is Roman Catholic, Protestant, Muslim, or belongs to "other denominations." The numbers are in percent and sum to 100. Thus, in the regressions, we include the Roman Catholic, Muslim, and Other Denomination variables, while omitting Protestant. The ethnic diversity and religious variables enter all of the regressions jointly significantly, which confirms the findings of LLSV (1999). We include each of the regulation and supervisory indexes sequentially.

The results in Table 3 Panel A are more consistent with the grabbing-hand view of regulation than the helping-hand view. Greater denial of entry applications, more regulatory restrictions on bank activities, greater official supervisory power, prohibitions on banks making loans abroad, and greater government ownership of banks are all strongly, negatively linked with government integrity. In contrast, regulatory regimes that empower private sector monitoring of banks through information disclosure have significantly lower levels of government corruption. Government corruption is essentially unrelated to a dummy variable that takes on the value one when there are multiple bank regulatory authorities and zero otherwise (Multiple Supervisory Agency). These results are robust to changes in the control variables.<sup>15</sup> 14 The variable Corrupt ranges from 0 to 6, with greater values signifying less corruption, or greater integrity. It is obtained from the International Country Risk Guide and is averaged over the 1990-99 period.

'5 As a robustness check, we extended the list of control variables in the corruption regressions. Specifically, LLSV (1999) note that some theories suggest the civil law countries tend to have more centralized, less competitive political regimes that are more conducive to government corruption than the more open, competitive political systems associated with common law countries. They argue that the common law developed to protect private property owners against the crown and therefore places great emphasis on restraining government excesses. In contrast, Napoleon used the codification of the French civil law to expand the discretionary powers of the State. LLSV (1999) find that French civil law countries have higher levels of corruption than Common law countries. We include indicators of legal origin in the Table 3 regressions. This does not alter the results. Furthermore, we added a direct measure of political openness, i.e., the Political Openness variable discussed on the next page. While Political Openness is negatively associated with corruption, it does not change the findings on bank regulations and supervisory practices.

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