Unsurprisingly, we find that this index is higher, the higher the fraction of the banking system that is in local private hands (Figure 2a). In other words, those countries that have predominantly government-owned or foreign-owned banking systems have lower values of this index. This can be seen as fitting, to the extent that their banks don’t need _local_ market discipline. On the other hand, there is no apparent correlation between the market monitoring index and per capita income (Figure 2b). Yes, the high income economies have a higher average value than the developing countries as a group, but within the latter, the average value actually declines as one moves from the lowest income categories. Overall, then, data for the private sector monitoring index does not suggest a systematic tendency for the preconditions for market discipline to be more absent at lower income categories.

Barth, Caprio and Levine (2003) found that the private monitoring index was negatively correlated with a variety of measures of banking risk. Here we use just one additional (inverse) measure of risk, De Nicoló’s _Z_ (cf De Nicoló et al., 2003). This is computed for each country as the average ratio for the largest banks of accounting capital to the standard deviation of bank earnings. The bivariate correlation between the private monitoring index and the risk measure _Z_ is quite strong (see Table 5, equation 1.1 below—lower values of _Z_ imply higher risk), though the relation is not very robust as will be shown below.

More speculatively, we can attempt to isolate components of the environment that are particularly relevant to each of the main flavors of market discipline. Table 3 proposes an allocation. For example, the key variable for depositor monitoring is absence of official depositor protection. As indicated in the Table 3, depositor discipline would also be particularly facilitated by a better information environment among the largest depositors, here crudely approximated by population size (the smaller the better). Likewise, better accounts, and accountability of bank management<sup>16</sup> is also assigned as likely to be particularly relevant to depositor monitoring of bank management.

Turning to discipline by equity and bond holders, the percentage of private banks that are listed will be especially important. Finally, for information specialists to be effective, it will be necessary for the banks to be rated (we count how many of the largest ten banks are rated) and for adequate auditing requirements (we measure this by asking if external audit by a certified auditor is compulsory).

The mean values for these variables, as measured using data from the Regulation Survey, are shown in Figures 3 and 4 and in Table 4.

Using data on these variables in regressions explaining allocation, we note that the key specific preconditions for depositor discipline and that provided by equity holders are again correlated with _Z_ and with the correct sign (Table 5, regressions 1.2 and 1.3). The presence of a formal deposit insurance scheme is used for depositor discipline, and an

> 16 Here measured by an index whose value is higher depending on whether interest accrued but unpaid is excluded from bank earnings, whether consolidation of group accounts is required, and whether bank directors are legally liable for misleading information

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