POLICYr RESEARCH WORKING PAPER 2725

# Suimmary findings

Barth, Caprio, and Levine draw on their new database on bank regulation and supervision in 107 countries to assess different governmental approaches to bank regulation and supervision and evaluate the efficacy of different regulatory and supervisory policies.

First, the authors assess two broad and competing theories of government regulation: the _helping-hand_ approach, according to which governments regulate to correct market failures, and the _grabbing-hand_ approach, according to which governments regulate to support political constituencies.

Second, they assess the effect of an extensive array of regulatory and supervisory policies on the development and fragility of the banking sector. These policies include the following:

* Regulations on bank activities and the mixing of banking arid commerce.

- Regulations on entry by domestic and foreign banks.

- Regulations on capital adequacy.

- Design features of deposit insurance systems.

Supervisory power, independence, and resources; stringency of loan classification; provisioning standaids; diversification guidelines; and powers to take prompt corrective action.

a Regulations governing information disclosure and fostering private sector monitoring of banks.

- Government ownership of banks.

The results raise a cautionary flag with regard to reform strategies that place excessive reliance on a country's adherence to an extensive checklist of regulatory and supervisory practices that involve direct government oversight of and restrictions on banks. IThe findings, which are much more consistent with the grabbing-hand view of regulation than with the help nghand view, suggest that the regulatory and supervisory practices most effective in promoting good performance and stability in the banking sector are those that force accurate information disclosure, empower private sector monitoring of banks, and foster incentives for private agents to exert corporate control.

This paper-a joint product of Finance, Development Research Group, and the Financial Sector Strategy and I'olicy Department-is partofalarger effortin the Bankto analyze the effectof financial sector regulation on development. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Agnes Yaptenco, room MC3-446, telephone 202-473-8526, fax 202-522-1155, email addressayaptenco@worldbank.org. IPolicy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at jba:-thhbusiness.auburn.edu, gcaprio@worldbank.org, or rlevine@cbcsom.umn.edu. November 2001. (63 pages) _Toe Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent._ Produced by the Policy Research Dissemination Center