metadata: authors: 0: author: Cihak, Martin
1: author: Demirguc-Kunt, Asli
2: author: Peria, Maria Soledad Martinez
3: author: Mohseni-Cheraghlou, Amin
count: World
docna: 0: docna: Bank regulation and supervision around the
            world : a crisis update
docty: Policy Research Working Paper
subtopic: Private Sector Economics,Banks & Banking Reform,Private Sector Development Law,Marketing,Deposit Insurance
teratopic: Private Sector Development,Finance and Financial Sector Development
abstracts: cdata!: This paper presents the latest update of
            the World Bank Bank Regulation and Supervision Survey, and
            explores two questions. First, were there significant
            differences in regulation and supervision between crisis and
            non-crisis countries? Second, what aspects of regulation and
            supervision changed significantly during the crisis period?
            The paper finds significant differences between crisis and
            non-crisis countries in several aspects of regulation and
            supervision. In particular, crisis countries (a) had less
            stringent definitions of capital and lower actual capital
            ratios, (b) faced fewer restrictions on non-bank activities,
            (c) were less strict in the regulatory treatment of bad
            loans and loan losses, and (d) had weaker incentives for the
            private sector to monitor banks' risks. Survey results
            also suggest that the overall regulatory response to the
            crisis has been slow, and there is room to improve
            regulation and supervision, as well as private incentives to
            monitor risk-taking. Specifically, comparing regulatory and
            supervisory practices before and after the global crisis,
            the paper finds relatively few changes: capital ratios
            increased (primarily among non-crisis countries), deposit
            insurance schemes became more generous, and some reforms
            were introduced in the area of bank governance and bank resolution.
repnme: repnme: Bank regulation and supervision around the
            world : a crisis update
display_title: Bank regulation and supervision
            around the world : a crisis update
listing_relative_url: /research/2012/12/17039335/bank-regulation-supervision-around-world-crisis-update
topicv3: Private Sector Development m1326060 1921,Commercial Banking m1326069 1236,Deposit Insurance m1326722 322,Bank Capital Adequacy m1326723 1241,Bank Regulation and Supervision m1327225 317
publishtoextweb_dt: 2012-12-01T00:00:00Z
historic_topic: Private Sector Development,Finance and Financial Sector Development
no_of_pages: 52
model_extractions: WPS6286 Policy Research Working Paper 6286

# Bank Regulation and Supervision around the World

A Crisis Update _Martin Čihák Aslı Demirgüç-Kunt María Soledad Martínez Pería Amin Mohseni-Cheraghlou_ The World Bank Office of the Chief Economist Finance and Private Sector Development Network & Development Research Group Finance and Private Sector Development Team December 2012
Policy Research Working Paper 6286

# **Abstract**

This paper presents the latest update of the World Bank Bank Regulation and Supervision Survey, and explores two questions. First, were there significant differences in regulation and supervision between crisis and noncrisis countries? Second, what aspects of regulation and supervision changed significantly during the crisis period? The paper finds significant differences between crisis and non-crisis countries in several aspects of regulation and supervision. In particular, crisis countries (a) had less stringent definitions of capital and lower actual capital ratios, (b) faced fewer restrictions on non-bank activities, (c) were less strict in the regulatory treatment of bad loans and loan losses, and (d) had weaker incentives for the private sector to monitor banks’ risks. Survey results also suggest that the overall regulatory response to the crisis has been slow, and there is room to improve regulation and supervision, as well as private incentives to monitor risk-taking. Specifically, comparing regulatory and supervisory practices before and after the global crisis, the paper finds relatively few changes: capital ratios increased (primarily among non-crisis countries), deposit insurance schemes became more generous, and some reforms were introduced in the area of bank governance and bank resolution.

This paper is a product of the Office of the Chief Economist, Finance and Private Sector Development Network; and Finance and Private Sector Development Team, Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at mcihak@worldbank.org, ademirguckunt@worldbank.org, mmartinezperia@worldbank.org, and amohsenicheraghl@ worldbank.org.

_The 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 views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Bank Regulation and Supervision around the World:**

# **A Crisis Update**

Martin Čihák, Aslı Demirgüç-Kunt, María Soledad Martínez Pería, and Amin Mohseni-Cheraghlou<sup>1</sup>

**Keywords** : Banking, Regulation, Supervision, Survey

**JEL Classification** : G10, G20, E58

## **Board:** FSE

> 1 The authors are with the World Bank. This paper’s findings, interpretations, and conclusions are entirely those of the authors and do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. Insights and encouragement from Jim Barth, Gerard Caprio, and Ross Levine, who organized the previous rounds of the survey, are gratefully acknowledged. The work on the 2011–12 round of the survey started with the collaboration of Roberto Rocha, Costas Stephanou, and Haocong Ren. The survey benefitted from inputs from numerous bank regulation experts in the World Bank, including Krishnamurti Damodaran, Katia D’Hulster, Cedric Mousset, and David Scott, as well outside, in particular, Michael Andrews and Jan-Willem van der Vossen. The survey would not have been possible without the many country officials answering the questionnaire. PKF (U.K.) and Auxilium helped with compiling and following up on the survey responses. The survey was financed in part with support from the U.K. Department for International Development (DFID). The analysis presented in this paper benefited from comments received at a World Bank seminar. Any remaining errors are ours.

1
# **I.   INTRODUCTION**

Bank regulation and supervision has been the subject of much recent debate and attention, due in large part to the global financial crisis that started in the late 2000s. A number of studies have pointed to weaknesses in regulation and supervision as one of the factors leading to the crisis (Dan, 2010; Lau, 2010; Levine, 2010; Merrouche and Neir, 2010; and Barth et al., 2012). Not only did the crisis raise important questions on the appropriateness of the regulatory and supervisory approaches pursued in the run-up to the crisis, but also it prompted regulators to consider important changes in regulation and supervision. Despite the high level of interest in the topic and extensive work on the global regulatory framework (exemplified for instance by the various initiatives of the Basel Committee on Banking Supervision), there is a surprising lack of consistent and up-to-date information on the regulatory and supervisory approaches pursued in countries around the world and the changes brought about by the crisis.

This paper presents and examines the World Bank’s 2011–12 Bank Regulation and Supervision Survey (BRSS). The survey is an updated and substantially expanded version of earlier surveys of the same name, released by the World Bank in 2001, 2003, and 2007.<sup>2</sup> The current, fourth iteration of the survey provides information on bank regulation and supervision for 143 jurisdictions (Table 1) and includes close to 300 questions. It covers the period 2008–10, and therefore, allows us to examine the recent state of bank regulation and supervision in a wide range of countries and to compare it to the pre-crisis situation.

Using the BRSS, this paper addresses two main questions: What are the features of the regulatory and supervisory frameworks of countries that were directly hit by the global financial crisis, and did they differ from the rest of the world? How have national regulatory and

> 2 Note that the three previous surveys captured information as of 1999, 2001, and 2005, respectively.

2
supervisory practices changed since the previous survey in response to the global financial crisis?

Based on a series of univariate tests, we find significant differences between crisis and non-crisis countries in several aspects of regulation and supervision. First, crisis countries had less stringent definitions of capital and lower actual capital ratios. Second, banks in crisis countries faced fewer restrictions on non-bank activities such as insurance, investment banking, and real estate. Third, regulations concerning the treatment of bad loans and loan losses were less strict in crisis countries. Finally, in crisis countries, there were weaker incentives for the private sector to monitor banks’ risks.

Comparing regulation and supervision before and after the global crisis, we see that the overall regulatory response to the crisis has been slow, although we find evidence of a number of significant changes. In particular, capital ratios increased, deposit insurance schemes became more generous, and reforms were introduced pertaining to bank governance and bank resolution. In some of these areas, we observe differences between crisis and non-crisis countries. These findings suggest the reform process is ongoing and there is still room for changes in both regulation and supervision frameworks and incentives for private monitoring.

This paper is related to studies that have examined previous rounds of the BRSS. Barth et al. (2001) present the data from the first BRSS. Using this survey, Barth et al. (2004) assess the relationship between specific regulatory and supervisory practices and banking-sector development, efficiency, and fragility. With the same dataset, Barth et al. (2006) show that restrictions on the entry of banks, government ownership of banks, and restrictions on bank activities hurt banking system performance. Finally, Barth et al (2008) compare the first three BRSSs (covering the period 1999-2005) and conclude that while many countries strengthened 3
capital regulations and official supervisory agencies over this period (following Basel guidelines), the reforms are not likely to improve bank stability or efficiency.

The rest of the paper is organized as follows. Section II introduces the 2011-12 BRSS, describing how it has been designed and implemented. Section III examines differences between the regulatory and supervisory framework of crisis and non-crisis countries. Section IV examines recent changes in regulation and supervision distinguishing between crisis and non-crisis countries. Section V concludes. Appendix I presents more detailed survey results, going through every section of the survey, providing an update on the state of regulation and supervision around the world across advanced economies and emerging and developing countries.

# **II.   THE DESIGN AND IMPLEMENTATION OF THE 2011-12 BRSS**

The survey provides data for 143 countries<sup>3</sup> , of which 37 are advanced economies and 106 are emerging markets and developing economies (EMDEs).<sup>4</sup> These include most major economies (all G-20 countries except for Japan and Saudi Arabia) and countries from all regions (Figure 1). Overall, the survey sample provides a broadly balanced representation of countries in terms of level of income and population size.

In terms of topical coverage, the survey is quite comprehensive, providing a unique and valuable set of information on a wide range of issues related to bank regulation and supervision. It contains over 270 questions, some with sub-questions. In total, the survey covers about 630 features of bank regulation and supervision, in the following 14 broad areas: (1) entry into banking, (2) ownership, (3) capital, (4) activities, (5) external auditing requirements, (6) bank

> 3 The 2011–12 Bank Regulation and Supervision Survey is available at http://go.worldbank.org/WFIEF81AP0. Data from previous iterations of the survey are available at http://go.worldbank.org/SNUSW978P0.

> 4 See Table 1 for a detailed list of countries in this survey. The distinction between “advanced economies” and “emerging market/developing/economies” follows IMF’s September 2011 _World Economic Outlook_ .

4
governance, (7) liquidity and diversification requirements, (8) depositor (savings) protection schemes, (9) asset classification, provisioning and write-offs, (10) accounting and information disclosure, (11) discipline/problem institutions/exit, (12) supervision, (13) banking sector characteristics, and (14) consumer protection. For reasons of comparability with the previous three rounds of the survey, about a half of the questions in the 2011–12 survey are similar to those in previous rounds. To result in more precise answers, a few questions have been reformulated. Also, almost half of the questions added were in particular on issues highlighted by the crisis (e.g., macro-prudential regulation and consumer protection) and on matters related to the implementation of the new Basel rules. Some 58 percent of the survey consists of binary questions that could be answered “Yes” or “No”. About 5 percent of the questions are categorical questions, wherein respondents are required to choose one or more options from a set of alternatives. The remaining 37 percent are quantitative questions, which include various questions about ratios, currency amounts, and other numerical indicators.

The survey was generally addressed to the head of banking supervision in the central bank or to the head of a separate banking supervision agency. In some countries, the responses were provided directly by the agency head. In other countries, the agency head delegated the completion of the questionnaire to the relevant senior-level staff.

The design and implementation of the survey entailed a significant and lengthy effort to ensure the consistency and comprehensiveness of responses across countries. First, in order to make questions clearer and answers more comparable across countries, detailed guidelines were drafted with the help of a senior banking regulator. Also, in each of the survey’s sections, the respondents had the option of entering other relevant country-specific information that was not captured by any of the existing questions in the survey that they thought needed to be included in 5
the dataset to ensure comprehensiveness. Second, after initial survey responses were received, they were cross-checked by an external consulting company (PKF UK and its partner Auxilium), World Bank staff, and a senior supervisory expert. In cases of obvious errors and inconsistencies in the responses, the regulators were contacted and requested to correct their responses. Finally, after cross-checking the responses obtained, the dataset was sent back to the regulators for their review and correction (if necessary).<sup>5</sup> Responses to some of the quantitative questions in Section 13 and some other sections of the questionnaire were excluded from the published version of the survey due to issues of comparability. Those questions cover topics on which consistent cross-country data are already available, such as total banking system assets. These questions are indicated with an asterisk in the guide to the survey.

The detailed country-by-country survey results and the guide to the questionnaire are available online, at <u>http://www.worldbank.org/financialdevelopment. The rest of the paper</u> highlights the main findings from the survey. More detailed tables and discussion of survey results can be found in Appendix I.

# **III.   DIFFERENCES BETWEEN CRISIS AND NON-CRISIS COUNTRIES**

Much has already been written about the causes of the recent global crisis (Caprio, Demirgüç-Kunt, and Kane, 2010; Demirgüç-Kunt and Serven, 2010; Rajan, 2010, among others), and discussion on the explanations of the crisis is still ongoing. In this section, we do not attempt to sort out among the many possible contributing factors that brought about the crisis, but rather focus on the potential role of gaps in regulation and supervision. To this effect, we set

> 5 74 countries responded with minor changes.

6
out to assess whether there were notable differences in the regulatory and supervisory structure of countries that were engulfed in the recent global crisis and those that were not. More specifically, we analyze the BRSS responses by crisis-hit countries and compare them to the rest of the world, using univariate tests to identify which parts of the regulatory and supervisory framework were different between these two groups of countries. We report differences between crisis and non-crisis countries based on the 2007 and 2011–12 surveys. The reason why we consider both surveys is because regulation and supervision could have changed during the crisis and we do not want to interpret differences found during the crisis as explaining why some countries experienced the crisis more strongly than others.

We identify crisis countries using the database assembled by Laeven and Valencia (2010). For the purpose of our calculations, crisis countries consist of two groups of countries identified in the Laeven and Valencia (2010) database. The first group comprises 13 countries that experienced a _systemic banking crisis_ between 2007 and 2009 (United States, United Kingdom, Iceland, Ireland, Latvia, Belgium, Luxembourg, Netherlands, Austria, Denmark, Germany, Kazakhstan, and Ukraine). The second group includes 8 countries that experienced a _borderline systemic crisis_ in the same period (France, Greece, Hungary, Portugal, Russia, Slovenia, Spain, and Switzerland). All the other countries in our database are treated as noncrisis countries. As a robustness check, we also perform calculations in which only the first group of 13 countries classified as _systemic banking crisis_ is identified as crisis countries, with broadly similar results.

To determine whether there are significant differences in regulation and supervision in crisis versus non-crisis countries, we conduct a series of mean t-tests on responses to individual survey questions. From this analysis, summarized in Table 2, five main findings stand out. First, 7
crisis countries tended to allow for less stringent definitions of capital, had more discretion in how banks calculated capital requirements, and exhibited lower actual capital ratios than the rest of the world. Both the 2007 and 2011–12 BRSSs show that crisis countries were more likely to allow the initial disbursement or subsequent injections of capital to be done with assets other than cash or government securities. At the same time, while 80 (100) percent of crisis countries allowed Tier 3 (Tier 2) in regulatory capital, only 28 (85) percent among non-crisis countries did so. Moreover, crisis countries were also more likely to allow hybrid debt instruments to be part of Tier 1. Also, the share of crisis countries that allowed banks to calculate their capital requirement for credit risk based on banks’ internal ratings models was 95 percent, about twice as a large as in the rest of the world. Finally, while the average level of the actual risk based capital ratio (Tier 1 capital to assets) of the banking system prior to the crisis was 16 (14) percent among non-crisis countries, this figure was 12 (9) percent among crisis countries. The same pattern is observed if we look at the statistics gathered in the 2011–12 Bank Regulation and Supervision Survey.

Second, banks in crisis countries faced fewer restrictions to engage in non-bank activities such as insurance, investment banking, real estate, as well as in non-financial activities. Using an index of 1 to 4 to measure restrictions imposed on bank activities, where higher values denote greater restrictions, we find that non-crisis countries were less likely to allow for a full range of non-bank activities to be conducted directly in banks.

Third, crisis countries were less likely to have in place non-performing loans and provisioning requirements and were more lax in the treatment of bad loans and loan losses. Close to 90 percent of non-crisis countries had an asset classification system under which banks had to report the quality of their loans using a common regulatory scale, while 57 and 65 percent of 8
crisis countries had such systems in place in the 2007 and the 2011–12 survey, respectively. Also, half of the crisis countries allowed accrued though unpaid interest/principal to enter the bank income statement when loans are non-performing, but only 24 percent of non-crisis countries allowed this by 2011-12. The comparison with the 2007 survey suggests that the practice of overestimating loan interest and principal payments got worse as the crisis unfolded and as banks tried to prop up their balance sheets. Moreover, while according to the 2011–12 survey in 53 percent of crisis countries banks were allowed to upgrade the classification of a loan or advance immediately after it had been restructured, this was the case in only 30 percent of non-crisis countries. According to the 2011–12 BRSS, while 70 percent of non-crisis countries had a regulatory requirement for general provisions on loans and advances, only 25 percent of crisis countries had such provisions in place. The 2011–12 survey shows that only 30 percent of crisis countries had minimum levels of specific provisions for loans and advances set by the regulator. Finally, almost 80 percent of non-crisis countries had such requirements in place.

Fourth, regulators in crisis countries were less able to demand banks to put up more equity, to constitute greater provisions or to suspend bonus and management fee payments. Based on the 2011–12 BRSS, in 83 percent of non-crisis countries the regulator had the power to request banks to put up new equity. This was true only in 65 percent of crisis countries. Similarly, according to the 2011–12 survey, in 98 percent of non-crisis countries, the regulator could request banks to constitute provisions to cover actual or potential losses. This was true in only 90 percent of crisis countries. Finally, according to the 2007 survey, in almost 70 percent of non-crisis countries regulators could suspend banks’ decision to pay certain bonuses or management fees. This was true in only 32 and 37 percent of crisis countries, respectively.

9
Fifth, even though crisis countries had stronger information disclosure requirements, the incentives for the private sector to monitor bank risks were weaker in these countries. At the start of the crisis, all crisis countries were required to produce consolidated accounts covering all bank and any non-bank financial subsidiaries. Crisis countries were more likely to require banks to disclose risk management procedures, capital ratios, transactions with related parties, and the scope of consolidation. In over 95 (79) percent of crisis countries, issuance of bonds (commercial paper) received a credit rating, whereas this happened in 47 (32) percent of non-crisis countries. While all crisis countries had an explicit deposit insurance scheme before the crisis erupted, this was in effect in about 50 percent of the non-crisis countries before the crisis and in 72 percent by the 2011–12 BRSS. According to the 2007 survey, in a larger share of crisis countries (11 percent in crisis versus 2 percent in non-crisis), the deposit insurance agency had the power to insure liabilities beyond any explicit deposit insurance scheme.

Overall, while these tests do not imply causality, they nevertheless provide suggestive evidence that crisis countries suffered from greater weaknesses in their bank regulations and supervision frameworks.

# **IV.   REGULATORY CHANGES IN THE CONTEXT OF THE GLOBAL FINANCIAL CRISIS**

By comparing responses to the 2011-12 and 2007 surveys, we are able to provide the first documentation of recent regulatory changes in the context of the global financial crisis. Overall, the survey responses underscore the evolutionary, slow nature of regulatory and supervisory changes. It does not appear that the recent global financial crisis caused a major and sudden change in regulatory frameworks around the world. For example, 85 percent of “yes” or “no” responses remained unchanged between the 2007 and 2011–12 surveys (i.e., “no” remained “no”, “yes” remained “yes”). Similarly, most of the quantitative indicators showed relatively 10
little overall movement throughout the crisis. Notwithstanding this gradual evolution of regulatory frameworks, there have been some notable changes in some areas of regulation and supervision.

Table 3 shows the subset of questions for which we observe statistical significant changes between the 2007 and 2011-12 surveys. The table presents responses from the 2007 and 2011-12 surveys for all countries combined and also distinguishes between crisis and non-crisis countries. Furthermore, for each question, the table shows the p-value from a test of differences in responses across the two surveys.

Overall, we find changes in the area of bank capitalization, governance, activities, diversification, auditing, and deposit insurance. Furthermore, in some instances we find differences between crisis and non-crisis countries. First, we find that non-crisis countries exhibited an increase in their risk based and tier 1 capital ratios, while changes among crisis countries were not statistically significant. Second, among non-crisis countries we observe an increase in the share of countries that set regulatory limits on related party exposures. On the other hand, the percentage of crisis countries that set regulatory limits on related party exposures declined between the 2007 and 2011-12 surveys. Third, among non-crisis countries there was an increase in the percentage of countries that impose regulatory rules or supervisory guidelines regarding asset diversification. Fourth, most countries (and especially) non-crisis countries exhibited a relaxation of restrictions on bank activities between 2007 and 2011-12. Fifth, the share of countries requiring audits and risk management procedures to be disclosed increased significantly across all countries. Sixth, the share of countries with explicit deposit insurance increased among non-crisis countries and the coverage of deposit insurance increased across all countries.

11
Comparing responses between the 2007 and 2011-12 surveys and attributing the changes observed to the crisis can be problematic because we cannot be certain that the changes observed were indeed triggered by the crisis. Hence, to investigate the changes that were directly related to the crisis, the 2011-12 survey includes questions that specifically ask regulators to identify reforms introduced in response to the crisis.

Table 4 lists these questions, the responses provided by crisis and non-crisis countries, and the p-values from tests of the null that the changes observed across countries are not significant. The responses confirm the changes in regulations pertaining to bank governance and deposit insurance highlighted above. Furthermore, Table 4 also suggests that bank resolution was also an area of reform after the crisis.

Interestingly, regulatory changes during the global financial crisis did not seem to differ significantly (with some exceptions) between countries that were directly hit during the global financial crisis and those that avoided the direct crisis impact (Table 4).<sup>6</sup> In the area of bank governance, crisis-hit countries were more than twice as likely as non-crisis countries to introduce new requirements on executive compensation (Table 4). In the area of deposit protection, we observe no significant differences. Similarly, in the area of bank resolution framework, the differences are not very strong.

Overall, while some of these reforms are encouraging, the survey suggests that the regulatory response to the crisis has been slow, and that there is room for further improving the regulatory and supervisory frameworks as well as private incentives to monitor risk-taking.

> 6 The analysis in this section uses the same definition of “crisis” and “non-crisis” countries as used in the preceding section.

12
# **V.   CONCLUSIONS**

The data collected via the 2011–12 Bank Regulation and Supervision Survey provide interesting insights into the state of regulatory and supervisory practices around the world against the background of the global financial crisis. The unique dataset, made publicly available at <u>http://www.worldbank.org/financialdevelopment, illustrates differences in regulation between</u> crisis and non-crisis countries and also highlights the ways in which bank regulation and supervision has changed so far as a result of the global financial crisis.

Comparing responses from crisis and non-crisis countries, we find that crisis countries (those with either full-fledged or borderline systemic banking crisis in 2007–09) tended to allow for less stringent definitions of capital, more discretion in how banks calculated capital requirements, and also exhibited lower actual capital ratios. At the same time, the analysis revealed that banks in crisis countries faced fewer restrictions to engage in non-bank activities such as insurance, investment banking and real estate activities. Crisis countries were also more lax in the treatment of bad loans and loan losses. Similarly, regulators in crisis countries were less able to demand banks to recapitalize banks, to constitute greater provisions or to suspend bonuses or management fees. Finally, even though crisis countries had stronger information disclosure requirements, the incentives for the private sector to monitor banks’ risks were weaker in crisis countries. Overall, while these tests do not imply causality, they nevertheless suggest that crisis countries had weaker regulatory and supervisory frameworks compared to those countries that fared better during the global financial crisis.

The survey results also underscore the evolutionary nature of the regulatory and supervisory changes at the national level. The recent financial crisis did not trigger a major and sudden change in national regulatory and supervisory frameworks around the world and most of 13
the observed changes are relatively slow and gradual. Nonetheless, there have been some notable developments in several areas: capital ratios increased (primarily among non-crisis countries), deposit insurance schemes became more generous, and reforms were introduced in the area of bank governance and bank resolution. While some of these reforms are encouraging, overall the survey results suggest that there is room for further improving the regulatory and supervisory frameworks as well as private incentives to monitor risk-taking.

14
# **References**

Barth, James; Caprio, Gerard; Levine, Ross, 2001. “The Regulation and Supervision of Banks Around the World: A New Database.” Brookings-Wharton Papers on Financial Services, Robert E. Litan and Richard Herring, Editors, Washington, DC: Brookings Institution Press, pp.183-240.

Barth, James; Caprio, Gerard; Levine, Ross, 2004. “Regulation and Supervision: What Works Best?” _Journal of Financial Intermediation_ 13, 205-248.

Barth, James; Caprio, Gerard; Levine, Ross, 2006. _Rethinking Bank Supervision and Regulation: Until Angels Govern_ , Cambridge University Press, 2006.

Barth, James; Caprio, Gerard; Levine, Ross, 2008. “Bank Regulations are Changing: For Better or Worse?” _Comparative Economic Studies_ , 50(4), 537-563.

Barth, James; Caprio, Gerard; Levine, Ross, 2012. _Guardians of Finance: Making Regulators Work for Us,_ MIT Press.

Caprio, Gerard; Demirguc-Kunt, Asli; Kane, Edward. 2010. “The 2007 Meltdown in Structured Securitization: Searching for Lessons not Scapegoats,” _World Bank Research Observer_ 25, 125-55.

Claessens, Stijn; Dell’Ariccia, Giovanni; Igan, Deniz; Laeven, Luc, 2010. “Lessons and Policy Implications from the Global Financial Crisis.” IMF Working Paper 10/44.

Dan, Kenneth, 2010. “The Subprime Crisis and Financial Regulation: International and Comparative Perspectives.” John M. Olin Law and Economics Working Paper No. 517. Demirguc-Kunt, Asli; Serven, Luis, 2010. “Are All the Sacred Cows Dead? Implications of the Financial Crisis for Macro- and Financial Policies.” _World Bank Research Observer_ 25(1), 91-124.

15
Laeven, Luc; Valencia, Fabian, 2010. “Resolution of Banking Crises: The Good, the Bad, and the Ugly.” IMF Working Paper 10/146.

Lawrence, Lau, 2010. “Financial Regulation and Supervision Post the Global Financial Crisis.” Working Paper No. 2. Institute of Global Economics and Finance, The Chinese University of Hong Kong.

Levine, Ross, 2010. “An Autopsy of the U.S. Financial System: Accident, Suicide, or Negligent Homicide.” _Journal of Financial Economic Policy_ 2(3), 196-213.

Merrouche, Ouarda; Nier, Erlend, 2010. “What Caused the Global Financial Crisis?

Evidence on the Drivers of Financial Imbalances 1999–2007.” IMF Working Paper 10/265.

Rajan, Raghuram, 2010. _Fault Lines: How Hidden Fractures Still Threathen the World Economy_ . Princeton, NJ: Princeton University Press.

16
<!-- Start of picture text -->
- os eu | YC<br>“ : Py I<br>Ue sa.<br>Il covered by survey y re<br>- [i not covered by survey > a «<br><!-- End of picture text -->
# **TABLE 1: JURISDICTIONS PARTICIPATING IN THE SURVEY**

|Angola|**Hong Kong SAR, China**|Pakistan|
|---|---|---|
|Argentina|Hungary|Palestinian Territory|
|Armenia|**Iceland**|Panama|
|**Australia**|India|Paraguay|
|**Austria**|Indonesia|Peru|
|Bahrain|Iraq|Philippines|
|Bangladesh|**Ireland**|Poland|
|Belarus|**Isle of Man**|**Portugal**|
|**Belgium**|**Israel**|Puerto Rico|
|Belize|**Italy**|Qatar|
|Benin|Jamaica|Romania|
|Bhutan|**Jersey**|Russian Federation|
|Bosnia and Herzegovina|Jordan|Samoa|
|Botswana|Kazakhstan|Senegal|
|Brazil|Kenya|Serbia|
|Bulgaria|Korea, Republic of (South Korea)|Seychelles|
|Burkina Faso|Kosovo|Sierra Leone|
|Burundi|Kuwait|**Singapore***|
|**Canada**|Kyrgyzstan|**Slovakia**|
|**Cayman Islands**|Latvia|Slovenia|
|Chile|Lebanon|South Africa|
|China-People's Rep.|Lesotho|**Spain**|
|Colombia|**Liechtenstein**|Sri Lanka|
|Cook Islands|Lithuania|Suriname|
|Costa Rica|**Luxembourg**|Swaziland|
|Côte d'Ivoire|**Macao, SAR**|**Switzerland**|
|Croatia|Madagascar|Syrian Arab Republic|
|**Cyprus**|Malawi|**Taiwan, China**|
|**Denmark**|Malaysia|Tajikistan|
|Dominican Republic|Maldives|Tanzania, United Republic of|
|Ecuador|Mali|Thailand|
|Egypt|**Malta**|Togo|
|El Salvador|Mauritius|Tonga|
|**Estonia**|Mexico|Trinidad and Tobago|
|Ethiopia|Moldova, Republic of|Tunisia|
|Fiji|Montenegro|Turkey|
|**Finland**|Morocco|Uganda|
|**France**|Mozambique|Ukraine|
|Gambia|Myanmar|United Arab Emirates|
|**Germany**|<br>Namibia|**United Kingdom**|
|<br>Ghana|Nepal|<br>**United States**|
|**Gibraltar**|<br>**Netherlands**|Uruguay|
|**Greece**|**New Zealand**|<br>Vanuatu|
|Guatemala|Nicaragua|Venezuela, Bolivarian Republic of|
|**Guernsey**|Niger|**Virgin Islands, British**|
|Guinea-Bissau|Nigeria|Yemen|
|Guyana|**Norway**|Zimbabwe|
|Honduras|Oman||

Notes: Advanced economies in bold. Emerging markets and developing economies in regular font. The classification follows IMF’s September 2011 _World Economic Outlook_ (WEO). For jurisdictions not classified by IMF’s 2011 WEO, 2010 output per capita figures were used to place the jurisdiction in one of the two income categories utilized in this paper. *A response was provided but only on a confidential basis; not part of the published dataset.

18
# **TABLE 2. DIFFERENCES IN RESPONSES BETWEEN CRISIS AND NON-CRISIS COUNTRIES**

This table shows responses to questions for which we found statistically significant differences between “crisis” and “non-crisis” countries. Following Laeven and Valencia (2010), the “crisis” countries between 2007 and 2009 include United States, United Kingdom, Iceland, Ireland, Latvia, Belgium, Luxembourg, Netherlands, Austria, Denmark, Germany, Kazakhstan, and Ukraine (cases of systemic banking crises); France, Greece, Hungary, Portugal, Russia, Slovenia, Spain, Switzerland (borderline cases). Student’s t-test are used to test for the equality of the means between crisis and non-crisis samples.

** denotes an index on activities’ restrictions takes that takes values from 1 to 4 where higher values denote stronger restrictions.1: A full range of these activities can be conducted directly in banks; 2: A full range of these activities are offered but all or some of these activities must be conducted in subsidiaries, or in another part of a common holding company or parent; 3: Less than the full range of activities can be conducted in banks, or subsidiaries, or in another part of a common holding company or parent; and 4: None of these activities can be done in either banks or subsidiaries, or in another part of a common holding company or parent.

||**Question**|**Crisis**|**Non-crisis**|**p-value**|
|---|---|---|---|---|
|**Capital regime**<br>**and actual**<br>**capital levels**|Can the initial disbursement or subsequent injections of capital<br>be done with assets other than cash or government securities?<br>(% Yes)<br>2007<br>2011|<br>57<br>70|37<br>29|0.086<br>0.000|
||Is Tier 2 allowed in regulatory capital? (% Yes)<br>2011|100|85|0.068|
||Is Tier 3 allowed in regulatory capital? (% Yes)<br>2011|80|28|0.000|
||Are hybrid debt capital instruments allowed as part of Tier 1?<br>(% Yes)<br>2011|79|32|0.000|
||Was the so-called advanced internal ratings-based approach<br>(A-IRB) offered to banks in calculating capital requirements<br>for credit risk? (% Yes)||||
||2007|81|42|0.001|
||2011|95|45|0.000|
||What was the actual risk based capital ratio of the banking<br>system as of end of: (Average %)||||
||<br>2007|12|16|0.004|
||2011|16|18|0.076|
||What was the actual Tier 1 capital ratio of the banking system<br>as of end of: (Average %)||||
||2007|9|14|0.001|
||2011|12|18|0.079|
|**Restrictions on**<br>**bank activities**<sup>**</sup>|Securities activities (Average Index)<br>2007|1.3|2.0|0.008|
||2011|1.2|1.9|0.002|
||Insurance activities (Average Index)<br>2007|2.8|3.3|0.012|
||2011|2.2|2.6|0.047|
||Real estate activities (Average Index)<br>2007|2.4|3.3|0.000|
||2011|2.1|3.0|0.001|

19
**TABLE 2. DIFFERENCES IN RESPONSES BETWEEN CRISIS AND NON-CRISIS COUNTRIES (CONT.)**

||**Question(Yes/no)**|**Crisis**|**Non-crisis**|**p-value**|
|---|---|---|---|---|
|**Asset**<br>**classification**<br>**mechanisms**|Do you have an asset classification system under which banks<br>have to report the quality of their loans and advances using a<br>common regulatory scale? (% Yes)||||
||<br>2007|<br>57|88|0.001|
||2011|65|89|0.004|
||Does accrued, though unpaid, interest/principal enter the bank's<br>income statement while the loan is classified as non-performing?<br>(% Yes)||||
||<br>2007|26|12|0.092|
||2011|50|24|0.021|
||Are banks allowed to upgrade the classification of a loan or<br>advance immediately after it has been restructured? (% Yes)<br>2011|<br>53|30|0.062|
||Do you require banks to write off non-performing loans after a<br>specific time period? (% Yes)<br>2011|0|47|0.000|
||Are there minimum levels of specific provisions for loans and<br>advances that are set by the regulator? (% Yes)<br>2011|30|79|0.000|
||Is there a regulatory requirement for general provisions on loans<br>and advances? (% Yes)<br>2011|25|70|0.000|
|**Supervisory**<br>**powers in cases of**<br>**bank losses**|Can the supervisory agency require commitment/action from<br>controlling shareholder(s) to support the bank with new equity<br>(e.g. capital restoration plan)? (% Yes)||||
||2011|65|83|0.059|
||Can the supervisory agency order the bank's directors or<br>management to constitute provisions to cover actual or potential<br>losses? (% Yes)||||
||2007|90|96|0.313|
||2011|90|98|0.049|
||Can the supervisory agency suspend the directors' decision to<br>distribute: Bonuses? (% Yes)<br>2007|32|68|0.002|
||Can the supervisory agency suspend the directors' decision to<br>distribute: Management fees? (% Yes)<br>||||
||2007|37|69|0.007|
|**Incentives and**<br>**information for**|Is there an explicit deposit insurance protection system? (% Yes)<br>2007|100|48|0.000|
|**markets to**|2011|100|72|0.006|
|**monitor banks**|Does the deposit insurance agency have the power to insure<br>liabilities beyond any explicit deposit insurance scheme? (% Yes)<br>2007|11|2|0.065|
||Must banks disclose to public: (% Yes)<br>Risk management procedures? 2007|71|40|0.008|
||Regulatory capital and capital adequacy ratio? 2011|95|74|0.034|
||<br>Transactions with related parties? 2011|<br>90|66|0.025|
||<br>Scope of consolidation 2011|<br>90|73|0.087|
||Which bank activities are rated: (% Yes)<br>Bonds issuance? 2007|95|47|0.000|
||Commercialpaper issuance? 2007|79|32|0.000|
||Are financial institutions required to produce consolidated<br>accounts covering all bank and any non-bank financial<br>subsidiaries (including affiliates of common holding companies)?<br>(% Yes)||||
||<br>2007|100|83|0.044|
||2011|100|96|0.399|

20
# **TABLE 3: CHANGES IN REGULATION AND SUPERVISION ACROSS COUNTRIES DURING 2007-2011**

This table shows responses to questions for which we found statistically significant differences between the 2007 and 2011 surveys. Following Laeven and Valencia (2010), the “crisis” countries between 2007 and 2009 include United States, United Kingdom, Iceland, Ireland, Latvia, Belgium, Luxembourg, Netherlands, Austria, Denmark, Germany, Kazakhstan, and Ukraine (cases of systemic banking crises); France, Greece, Hungary, Portugal, Russia, Slovenia, Spain, Switzerland (borderline cases). Student’s t-test are used to test for the equality of the means between responses to the 2007 and 2011 surveys.

|**Section**|**Question**||**All**|**Crisis**|**Non-Crisis**|
|---|---|---|---|---|---|
|**Capital regime**<br>**and actual capital**<br>**levels**|What was the actual risk based capital ratio of<br>the banking system? (Average %)|2007<br>2011<br>p-value|15.45<br>17.45<br>0.003|12<br>14<br>0.126|16<br>18<br>0.012|
||What was the actual Tier 1 capital ratio of the<br>banking system?<br>(Average %)|2007<br>2011<br>|13.38<br>15.93<br>|10<br>12<br>|15<br>17<br>|
|||p-value|0.013|0.101|0.037|
|**Governance**|Is there a regulatory limit on related party<br>exposures? (% Yes)|2007<br>2011|87<br>96|100<br>77|85<br>100|
|||p-value|0.024|0.082|0.00|
||What are the conditions under which banks can|2007|1.98|1.5|2.1|
|**Restrictions on**<br>**activities**|engage in securities activities? (Index takes<br>values from 1 to 4 where higher values denote<br>stronger restrictions.)|2011<br>p-value|1.73<br>0.0134|1.2<br>0.0563|1.8<br>0.0374|
||What are the conditions under which banks can<br>engage in insurance activities? (Index takes<br>values from 1 to 4 where higher values denote<br>stronger restrictions.)|2007<br>2011<br>p-value|3.07<br>2.48<br>0.000|2.8<br>2.2<br>0.0235|3.1<br>2.5<br>0.000|
||What are the conditions under which banks can<br>engage in real estate activities? (Index takes<br>values from 1 to 4 where higher values denote<br>stronger restrictions.)|2007<br>2011<br>p-value|3.12<br>2.83<br>0.008|2.4<br>2.2<br>0.204|3.3<br>3<br>0.019|
|**Asset diversification**|Are there any regulatory rules or supervisory<br>guidelines regarding asset diversification? (%<br>Yes)|2007<br>2011<br>p-value|46<br>59<br>0.025|43<br>52<br>0.493|46<br>60<br>0.032|
||Are banks prohibited from making loans<br>abroad? (% Yes)|2007<br>2011|9<br>18|10<br>0|9<br>22|
|||p-value|0.018|0.162|0.002|
|**Deposit insurance**|Is there an explicit deposit insurance protection<br>system for commercial banks? (% Yes)|2007<br>2011|66<br>77|100<br>100|58<br>71|
|||p-value|0.000|.|0.000|
||Does the deposit insurance scheme also cover<br>foreign currency deposits? (% Yes)|2007<br>2011|81<br>16|90<br>20|78<br>14|
|||p-value|0.000|0.000|0.000|
||Does the deposit insurance scheme also cover<br>interbank deposits? (% Yes)|2007<br>2011|9<br>86|0<br>95|12<br>82|
|||p-value|0.000|0.000|0.000|
||Were any deposits not explicitly covered by the<br>deposit insurance scheme at the time of failure<br>compensated the last time a bank failed<br>(excluding funds later paid out in liquidation<br>procedures)?(% Yes)|2007<br>2011<br>p-value|38<br>21<br>0.031|12<br>12<br>.|53<br>27<br>0.018|

21
**TABLE 3: CHANGES IN REGULATION AND SUPERVISION ACROSS COUNTRIES DURING 2007-2011** **<u>(CONT.)</u>**

|**Section**|**Question**||**All**|**Crisis**|**Non-Crisis**|
|---|---|---|---|---|---|
|**Auditing**|Are banks required to prepare consolidated<br>accounts for accounting purposes? (% Yes)|2007<br>2011|91<br>97|100<br>100|89<br>97|
|||p-value|0.020|.|0.020|
||Is it required by the regulators that bank audits<br>be publicly disclosed? (% Yes)|2007<br>2011|77<br>90|75<br>95|77<br>86|
|||p-value|0.011|0.1036|0.040|
||Must banks disclose their risk management<br>|2007|49|68|44|
||procedures to the public? (% Yes)|2011|82|95|78|
|||p-value|0.000|0.030|0.000|

22
# **Table 4. Regulatory Changes Introduced in Response to the Crisis**

Following Laeven and Valencia (2010), the “crisis” countries between 2007 and 2009 include United States, United Kingdom, Iceland, Ireland, Latvia, Belgium, Luxembourg, Netherlands, Austria, Denmark, Germany, Kazakhstan, and Ukraine (cases of systemic banking crises); France, Greece, Hungary, Portugal, Russia, Slovenia, Spain, Switzerland (borderline cases). Student’s t-test are used to test for the equality of the means (percentage of “Yes” responses) between crisis and non-crisis samples.

|**Have you introduced changes to the bank governance framework in your**<br>**country as a result of the global financial crisis?**|**Crisis**|**Non-Crisis**|**p-value**|
|---|---|---|---|
|a. New requirements on executive compensation? (%Yes)|67|28|0.001|
|b. Independence of the Board? (%Yes)|0|13|0.104|
|c. Chief risk officer direct reporting line to the Board or Board Committee? (%Yes)|0|12|0.123|
|d. Existence of a Board risk committee? (%Yes)|0|19|0.043|
|e. Other? (%Yes)|33|58|0.059|
|**Have you introduced changes to your deposit protection system as a result of**<br>**the global financial crisis?**|**Crisis**|**Non-Crisis**|**p-value**|
|a.Expansion of coverage (types of exposures, nature of depositors etc.)? (%Yes)|16|17|0.878|
|b.Increase in amount covered? (%Yes)|68|61|0.573|
|c.Temporary inclusion of guarantees on bank debt? (%Yes)|0|0|.|
|d.Government guarantee of deposits and bank debts? (%Yes)|16|4|0.119|
|e. Other? (%Yes)|21|33|0.359|
|**Have you introduced significant changes to the bank resolution framework in**<br>**your country as a result of the global financial crisis?**|**Crisis**|**Non-Crisis**|**p-value**|
|a. Introduce a separate bank insolvency framework? (%Yes)|6|9|0.643|
|b. Implement coordination arrangements among domestic authorities? (%Yes)|23|43|0.137|
|c. Other? (%Yes)|82|54|0.032|

23
# **APPENDIX I: THE SURVEY RESULTS, SECTION BY SECTION**

# **Section 1: Entry into Banking**

This part of the survey contains 18 questions covering bank licensing and entry requirements, the existence of entry restrictions for foreign entities, and the number of applications for bank licenses received, accepted, and denied during the five years prior to the survey. More than 90 percent of the questions in this part of the survey are similar to those included in the 2007 survey, making temporal comparisons readily possible.

We observe changes between the 2011–12 and 2007 surveys along several fronts (Table A1). First, the percentage of countries requiring more than one license for entry into banking declined significantly from 47 percent in 2005 to 16 percent in 2010.<sup>7</sup> Second, a slightly higher percentage of countries (an increase from 92 percent in 2005 to 97 percent in 2010) legally required that the source of funds that are to be used as entry capital be explicitly identified. Third, between 2005 and 2010, a higher percentage of EMDEs prohibited entry of foreign entities through joint ventures and to some degree through acquisition of domestic banks and via the establishment of subsidiaries. While restrictions on the entry of foreign banks through the establishment of branches have declined in EMDEs, it is still, however, by far the most common form of entry restriction among EMDEs. In contrast, there are no prohibitions to the entry of foreign banks in advanced economies. Fourth, between the two rounds of the survey, the median of the minimum capital required for entry increased significantly for EMDEs (from 5.9 to 11.5 million dollars), while it has remained almost unchanged among the advanced economies. Fifth, relative to advanced economies, EMDEs have become a more popular destination for foreign banks. While the number of foreign bank applications increased by 74 percent in EMDEs between 2005 and 2010, this figure declined by 51 percent for the advanced economies. Note that if we concentrate on a “matched sample” – those countries that responded to both survey – we observe a smaller contrast between advanced economies and EMDEs. Among the latter, foreign bank applications increased by 19 percent and they declined by 21 percent for advanced countries. Finally, both the number of total license applications and rejections increased between 2005 and 2010. The increase in rejections was mainly driven by a 15 percentage points increase in the rejection rate for domestic bank applications, which was in turn mainly due to an increase in rejection rates from 9 to 26 percent in EMDEs.

> 7 If we limit our analysis only to those countries that have responded to both surveys, the drop is slightly larger from 49 percent in 2005 to 16 percent in 2010.

24
# **<u>Table A1. Entry into Banking: Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Licensing Requirements**|**% Yes**|**% Yes**|**% Yes**|
|Do you have the authority to take legal action against those entities that undertake<br>banking activities without a given license?|91|95|90|
|Is more than one license required (e.g. one for each banking activity, such as<br>deposit-taking, consumer lending etc.)?|16<br>(47)|16<br>(51)|16<br>(45)|
|What is legallyrequired to be submitted before issuance of the bankinglicense?||||
|Draft bylaws|94<br>(96)|92<br>(92)|95<br>(97)|
|Intended organizational chart|99<br>(99)|100<br>(95)|99<br>(98)|
|Structure of Board (composition, committees, functions)|98|100|97|
|Market / business strategy|100|100|100|
|Financial projections for first three years|99<br>(99)|100<br>(97)|99<br>(99)|
|Financial information on main potential shareholders|100<br>(98)|100<br>(95)|100<br>(99)|
|Background/experience of future board directors|99<br>(97)|100<br>(97)|98<br>(97)|
|Background/experience of future senior managers|93<br>(95)|86<br>(89)|95<br>(97)|
|Source of funds to be used as capital|97<br>(92)|92<br>(84)|99<br>(94)|
|**B.**<br>**Entry of Foreign Entities**|**% Yes**|**% Yes**|**% Yes**|
|Are foreign entities prohibited from entering through acquisition?|3<br>(2)|0<br>(0)|4<br>(3)|
|Are foreign entities prohibited from entering through subsidiary?|4<br>(2)|0<br>(0)|5<br>(3)|
|Are foreign entities prohibited from entering through branch?|14<br>(20)|0<br>(0)|19<br>(26)|
|Are foreign entities prohibited from entering through joint venture?|9<br>(5)|0<br>(0)|12<br>(7)|
|**C. Minimal Capital Entry Requirements**|**Median **|**Median **|**Median **|
|What is the minimum capital entry requirement for commercial bank operations for<br>domestic bank? (2010 Million USD)|10.0<br>(6.4)|7.2<br>(7.5)|11.5<br>(5.9)|
|What is the minimum capital entry requirement for commercial bank operations for a<br>subsidiaryof a foreign bank?(2010 Million USD)|8.1|7.1|10.5|
|What is the minimum capital entry requirement for commercial bank operations for a<br>branch of a foreign bank?(2010 Million USD)|6.4|2.4|8.1|
|**D. Rejection Rates for Entry Applications**|**ALL**|**ADV**|**EMDEs**|
|Number of domestic applications received|782<br>(321)|198<br>(109)|584<br>(212)|
|Fraction of domestic denied ( % out of # applications received)|22<br>(7)|10<br>(2)|26<br>(9)|
|Number of foreign applications received|1,141<br>(1,282)|421<br>(868)|720<br>(414)|
|Fraction of foreign applications denied ( % out of # of applications received)|7<br>(4)|3<br>(1)|9<br>(12)|
|Number of total (foreign and domestic) applications received|1,923<br>(1,603)|619<br>(977)|1,304<br>(626)|
|Fraction of total applications denied ( % out of total received)|13<br>(5)|5<br>(1)|17<br>(11)|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (Table 1 provides the complete list of countries).

25
# **Section 2: Ownership**

Section 2 of the 2011–12 survey includes 12 questions and focuses on regulations of bank ownership. We observe that public disclosure of the ultimate owner of banks is required in over 50 percent of the jurisdictions (Table A2). Furthermore, while the criminal and bankruptcy records of potential shareholders are scrutinized by regulators in most countries, educational background and banking-related experience are assessed only in 40 to 60 percent of the countries. While not all questions in Section 2 can be compared to the previous round of the survey, generally, we observe small changes for those questions that are comparable. There is, however, one notable exception, related to nonfinancial firms’ ability to own voting shares in commercial banks. Specifically, a significant share of EMDEs shifted from not having the right to own voting shares to being able to own 100 percent equity in commercial banks.

**Table A2.** **<u>Ownership: Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Overview**|**% Yes**|**% Yes**|**% Yes**|
|Does the regulator have the legal authority to oppose the ultimate (beneficial) owner<br>when assessingbank ownership?|89|90|89|
|Do laws or regulations require the ultimate (beneficial) owner and controller of a bank<br>to bepubliclydisclosed?|52|47|54|
|Can related parties own capital in a bank?|96<br>(97)|100<br>(95)|95<br>(98)|
|**B.**<br>**Requirements for Evaluation/Approval of Significant Bank**<br>**Shareholders**|**% Yes**|**% Yes**|**% Yes**|
|Minimum level of education|42|37|44|
|Minimum level of financial and/or banking related experience|61|54|63|
|Financial capacity to support bank capital|93|91|94|
|No criminal record|94|89|96|
|No bankruptcy record|92|91|93|
|Lack of conflict of interest|81|80|81|
|**C. Nonfinancial Firms Own Voting Shares in Commercial Banks**|**% Yes**|**% Yes**|**% Yes**|
|Nonfinancial firm may own 100 of the equity in a commercial bank.|15<br>(7)|11<br>(14)|17<br>(5)|
|Nonfinancial firm may own 100 of the equity in a commercial bank, but prior<br>authorization or approval is required.|56<br>(52)|69<br>(62)|51<br>(48)|
|Limits are placed on ownership of banks by nonfinancial firms, such as maximum<br>percentage of a commercial bank's capital or shares.|29<br>(30)|22<br>(24)|32<br>(32)|
|Nonfinancial firms cannot own any equity investment in a commercial bank|1<br>(11)|0<br>(0)|1<br>(15)|
|**D. Maximum Percentage of a Bank's Equity That Can be Owned by a**<br>**Single Owner**|**Median**|**Median**|**Median**|
|2010 (%)<br>2005 (%)|100<br>(100)|100<br>(100)|100<br>(100)|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (Table 1 provides the complete list of countries).

26
<!-- Start of picture text --> 40%<br>30%<br>20%<br>10%<br>0%<br>Increased Increased slightly Neutral/little change Decreased slightly Decreased<br>substantially substantially<br>MAL @ Advanced Developing & Emerging<br><!-- End of picture text -->
<!-- Start of picture text --> 38 *<br>34<br>me<br>B=<br>430 . .<br>= 26 . +<br>SE 22 : . . : .<br>aEa= * + F 3 *<br>ae i : . .<br>cS ca + * +<br>= 14 * * i<br>=a j . *<br>6<br>6 8 10 12 14 16<br>Minimum Required Risk-Based Regulatory Capitel as of End of 2010 (72)<br><!-- End of picture text -->
**<u>Table A3. Capital: Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Overview**|**% Yes**|**% Yes**|**% Yes**|
|Do you require banks to perform an internal assessment of their capital adequacy<br>against their economic capital?|60|89|49|
|Do you review internal assessments performed by banks?|95|100|91|
|Does your agency have the legal authority to require additional capital that is over-<br>and-above the minimum required capital for individual banks if deemed necessary?|88|100|83|
|Is Common equity allowed in regulatory capital?|84|92|81|
|Is Tier 1 allowed in regulatory capital?|94|100|92|
|Is Tier 2 allowed in regulatory capital?|88|100|83|
|Is Tier 3 allowed in regulatory capital?|36|69|23|
|**B.**<br>**Minimum Regulatory Capital Ratio Vs. Actual Capital Ratio in Banking**<br>**System **|**Median**|**Median**|**Median**|
|What was the minimum required risk-based regulatory capital ratio as of end of:<br>2010 (%)<br>2005(%)|8.3<br>(8.0)|8.0<br>(8.0)|10.0<br>(8.0)|
|What was the actual risk based capital ratio of the banking system as of end of:<br>2010 (%)<br>2005(%)|16.2<br>(14.3)|15.4<br>(12.3)|17.1<br>(14.7)|
|What was the actual Tier 1 capital ratio of the banking system as of end of:<br>2010 (%)<br>2005(%)|14.1<br>(12.5)|12.7<br>(9.6)|14.6<br>(13.4)|
|**C. Regulatory Capital Adequacy Regimes**|**% Yes**|**% Yes**|**% Yes**|
|Leverage Ratio|15<br>(19)|14<br>(9)|15<br>(23)|
|Basel I|47|14|59|
|Basel II|57|95|42|
|Simplified standardized approach (SSA)|15|16|14|
|Standardized approach (SA)|80<br>(96)|95<br>(100)|70<br>(94)|
|Foundation internal ratings-based approach (F-IRB)|55<br>(55)|92<br>(86)|30<br>(40)|
|Advanced internal ratings-based approach (A-IRB)|55<br>(49)|95<br>(83)|28<br>(33)|
|Basel II: Will Implement by 2014|17|5|21|
|Percent of Countries Implementing Basel II by 2014|73|100|62|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (Table 1 provides the complete list of countries) 29
# **Section 4: Activities**

Section 4 of the 2011–12 survey, which includes six main questions, gathers information on the regulations regarding the activities in which banks can engage, such as securities, insurance, and real estate, as well as on the extent to which banks can own voting shares in non- financial firms and the type of financial conglomerates allowed. Table A4 summarizes selected responses.

Overall, but especially among advanced economies, the share of countries allowing for a full range of securities and insurance activities (either conducted directly or through subsidiaries, in the case of EMDEs) increased between 2005 and 2010. While the share of countries allowing banks to engage in real estate activities directly or through subsidiaries increased from 12 to 16 percent (especially, among EMDEs, from 6 to 13 percent) a much higher percentage of countries restricted such activities all together. In particular, while 40 percent of jurisdictions reported that their banks cannot engage in real estate related activities, only 17 percent and 7 percent expressed such restrictions for the case of insurance and securities activities, respectively.

The percentage of jurisdictions allowing for banks to own 100 percent of equity in any nonfinancial firm went up from 7 percent in 2005 to 24 percent in 2010, highlighting the growing influence of banks in various non-financial sectors of the economy. The increase was particularly notable among EMDEs.

Finally, regarding the type of financial conglomerates that are allowed, we find that the most common form for EMDEs involves those cases where the bank is the parent (64 percent). On the other hand, among advanced economies, 59 percent allow conglomerates whose parent was a non-financial institution.<sup>9</sup>

> 9 If we limit our analysis to only those countries that have responded to both surveys (i.e., the “matched” sample), the resulting trends highlighted in this section are similar with only slight changes in the magnitudes of these trends.

30
# **Table A4. Activities:** **<u>Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Conditions Under Which Banks Can Engage in Securities Activities**|**% Yes**|**% Yes**|**% Yes**|
|A full range of these activities can be conducted directly in banks.|50<br>(49)|78<br>(54)|39<br>(47)|
|A full range of these activities are offered but all or some of these activities must<br>be conducted in subsidiaries, or in another part of a common holding company or<br>parent.|30<br>(25)|11<br>(38)|37<br>(20)|
|Less than the full range of activities can be conducted in banks, or subsidiaries, or<br>in anotherpart of a common holdingcompanyorparent.|13<br>(17)|11<br>(5)|14<br>(21)|
|None of Such activities can be done in either banks or subsidiaries, or in another<br>part of a common holdingcompanyorparent.|7<br>(9)|0<br>(3)|10<br>(12)|
|**B.**<br>**Conditions Under Which Banks Can Engage in Insurance Activities**|**% Yes**|**% Yes**|**% Yes**|
|A full range of these activities can be conducted directly in banks.|5<br>(1)|11<br>(5)|3<br>(0)|
|A full range of these activities are offered but all or some of these activities must<br>be conducted in subsidiaries, or in another part of a common holding company or<br>parent.|50<br>(16)|56<br>(22)|48<br>(14)|
|Less than the full range of activities can be conducted in banks, or subsidiaries, or<br>in anotherpart of a common holdingcompanyorparent.|28<br>(44)|25<br>(65)|29<br>(37)|
|None of such activities can be done in either banks or subsidiaries, or in another<br>part of a common holding company or parent|17<br>(38)|8<br>(8)|20<br>(49)|
|**C. Conditions Under Which Banks Can Engage in Real Estate**<br>**Activities**|**% Yes**|**% Yes**|**% Yes**|
|A full range of these activities can be conducted directly in banks.|16<br>(12)|22<br>(30)|13<br>(6)|
|A full range of these activities are offered but all or some of these activities must<br>be conducted in subsidiaries, or in another part of a common holding company or<br>parent.|23<br>(14)|33<br>(14)|19<br>(14)|
|Less than the full range of activities can be conducted in banks, or subsidiaries, or<br>in another part of a common holding company or parent.|21<br>(17)|17<br>(24)|23<br>(15)|
|None of such activities can be done in either banks or subsidiaries, or in another<br>part of a common holding company or parent.|40<br>(57)|28<br>(32)|45<br>(65)|
|**D. Can Banks Own Voting Shares in Nonfinancial Firms**|**% Yes**|**% Yes**|**% Yes**|
|A bank may own 100% of the equity in any nonfinancial firm.|24<br>(7)|25<br>(11)|23<br>(6)|
|A bank may own 100% of the equity in a nonfinancial firm but ownership is<br>limited based upon a bank's equity capital.|34<br>(49)|32<br>(62)|35<br>(44)|
|A bank can only acquire less than 100%.|39<br>(34)|43<br>(27)|38<br>(36)|
|A bank may not have any equity investment in a nonfinancial firm.|3<br>(11)|0<br>(0)|3<br>(15)|
|**E.**<br>**Type Of Financial Conglomerate Structures Involving Banks That**<br>**Are Allowed**|**% Yes**|**% Yes**|**% Yes**|
|Conglomerates whose parent is a bank.|60|50|64|
|Conglomerates whose parent is a non-bank financial institution (e.g. insurance<br>company or securities firm).|22|26|20|
|Conglomerates whose parent is a non-financial institution (e.g. non-operating<br>financial holdingcompany).|44|59|37|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (Table 1 provides the complete list of countries).

31
# **Section 5: External Auditing Requirements**

Section 5 of the survey contains 19 questions, about half of which are also found in the 2007 survey. The main change observed in the data since the previous survey is an increase in the percentage of countries that require that the auditor’s report on each bank be publicly disclosed (Table A5). This percentage rose from 75 to 87 percent among all countries.<sup>10</sup> Another significant change has been the increase in the powers of the supervisor vis _-_ à _-_ vis the auditor in EMDEs. The percentage of countries where the supervisor has the power to take actions against the auditor increased from 59 to 76 percent.<sup>11</sup> Furthermore, the share of EMDEs where the supervisor has taken legal actions against the auditor rose from 10 to 42 percent.<sup>12</sup>

**Table A5. External Auditing Requirements:** **<u>Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Overview**|**% Yes**|**% Yes**|**% Yes**|
|Is an audit by a professional external auditor required for all<br>commercial banks inyourjurisdiction?|100<br>(99)|100<br>(97)|100<br>(100)|
|Are specific requirements for the extent or nature of the audit spelled<br>out?|85<br>(84)|70<br>(78)|91<br>(87)|
|Does the banking supervisor have the right to meet with the external<br>auditors and discuss their report without the approval of the bank?|93<br>(91)|92<br>(92)|93<br>(90)|
|Is the audit report on the financial statements of a bank required to be<br>publicly disclosed together with these financial statements?|87<br>(75)|95<br>(71)|84<br>(76)|
|Are auditors required to promptly inform banking supervisors when<br>they identify information that could affect the safety and soundness of a<br>bank?|90<br>(86)|100<br>(86)|86<br>(85)|
|In cases where the supervisor identifies that the bank has received an<br>inadequate audit, does the supervisor have the powers to take actions<br>against the external auditor?|70<br>(60)|57<br>(61)|76<br>(59)|
|Has legal action been taken against an auditor in the last 5 years?|40<br>(14)|35<br>(22)|42<br>(10)|
|In cases where the supervisor identifies that the bank has received an<br>inadequate audit, does the supervisor have the powers to take actions<br>against the bank?|91|89|91|
|Do supervisors delegate part of their supervisory tasks to external<br>auditors?|42|41|43|
|Do regulations explicitly prohibit auditing firms from providing non-<br>audit services to the banks whose financial accounts they audit?|55|31|65|
|Are external auditors subject to independent oversight by:<br>Ministry of Finance or other government department?|24|22|25|
|Specialized public entity (e.g. independent audit regulator)?|42|51|39|
|Bankingsupervisoryagency?|23|11|28|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (Table 1 provides the complete list of countries).

> 10 If we focus on the sample of countries that responded to both the 2007 and 2011–12 survey (i.e., the “matched” sample) the increase is smaller from 82 to 88 percent.

> 11 Note that in the “matched” sample, the increase is smaller from 68 to 73 percent.

> 12 Once again, in the “matched” sample, the increase is smaller from 11 to 27 percent.

32
<!-- Start of picture text --> 0% 20% 40% 60% 80% 100%<br>New requirements on executive compensation<br>Independence of the Board<br>Chief risk officer direct reporting line to the Board or<br>Board Committee<br>Existence of a Board risk committee<br>Other changes<br>BAL Advanced Developing & Emerging<br><!-- End of picture text -->
Another important issue covered by the 2011–12 Bank Regulation and Supervision Survey pertains to the definition and the limits on related party exposures. About 95 percent of respondents state that their countries include as “related parties” significant controlling shareholders and board of directors along with the relatives and business interests of these two parties. In general, EMDEs have slightly stricter regulations and guidelines governing related parties. Note that what appears to be a drop in the median of the limit of related party exposure as a percentage of a bank's regulatory capital from 100 percent in 2005 to 25 percent in 2010 is in large part driven by differences in the sample of countries that responded to both surveys. If we focus on the “matched” sample, this change disappears.

**Table A6. Bank Governance:** **<u>Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Authority Over Appointments**|**% Yes**|**% Yes**|**% Yes**|
|Does the supervisor exercise approval authority with respect to the appointment of<br>Board directors?|85|91|83|
|Does the supervisor exercise approval authority with respect to the appointment of<br>Senior bank management?|79|80|78|
|**B.**<br>**Remuneration or Compensation**|**% Yes**|**% Yes**|**% Yes**|
|Is the remuneration or compensation of Board directors evaluated as part of the<br>supervisory process to ensure that theydo not lead to excessive risk-taking?|59|74|53|
|Is the remuneration or compensation of Senior bank management evaluated as part<br>of the supervisory process to ensure that theydo not lead to excessive risk-taking?|59|78|52|
|Is the remuneration or compensation of Other bank staff (e.g. traders) evaluated as<br>part of the supervisory process to ensure that they do not lead to excessive risk-<br>taking?|53|75|45|
|Does the supervisory agency have the authority to take regulatory action when it<br>considers that the remuneration or compensation is excessive?|74|89|68|
|**C. Related Parties**|**% Yes**|**% Yes**|**% Yes**|
|Does the regulatory definition of related parties include Significant/controlling<br>shareholders?|95|94|96|
|Does the regulatory definition of related parties include Board directors?|97|94|98|
|Does the regulatory definition of related parties include Relatives of<br>significant/controllingshareholders and board directors?|94|94|94|
|Does the regulatory definition of related parties include Business interests of<br>significant/controllingshareholders, board directors, and their relatives?|94|89|96|
|Is there a regulatory limit on related party exposures?|95|86|99|
|**D. Some More Details ...**|**Median**|**Median**|**Median**|
|How many enforcement actions have you taken over the past 5 years (2006-2010)<br>based on a breach of anyof the above bankgovernance requirements?|0|0|0|
|What is the limit on related party exposure as a percentage of a bank's regulatory<br>capital(%)?|20<br>(100)|25<br>(100)|20<br>(100)|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (Table 1 provides the complete list of countries).

34
# **Section 7: Liquidity and Diversification Requirements**

Section 7 of the 2011–12 survey includes nine main questions covering regulations on liquidity and diversification requirements, approximately half of which are comparable to the previous round of the survey.

Overall, 86 percent of the countries have rules or supervisory guidelines regarding contingency funding plans, including stress testing of banks’ liquidity management (Table A7). About three quarters of the jurisdictions that participated in the recent survey reported having regulatory rules or supervisory guidelines regarding diversification of funding sources of banks' liquidity management, requirements for the management of foreign currencies and regulatory minimum ratio on liquid assets. On the other hand, 55 percent of the countries have maturity mismatch/gap limit requirements.

There have been some notable changes between the current and previous rounds of the survey. For example, in 2010, 56 percent of countries reported having regulatory rules or supervisory guidelines regarding asset diversification, which was 10 percentage points higher than in 2005.<sup>13</sup> Furthermore, 28 percent of EMDEs in 2010, up from 11 percent in 2005, reported that they prohibited making loans to foreign borrowers. On this front, the share of the advanced economies dropped from a mere three percent in 2005 to zero percent 2010. Moreover, 99 percent of jurisdictions in 2010, a slight uptick from 97 percent in 2005, report having limits on their lending to a single borrower or group of inter-related borrowers. This slight increase was mainly driven by advanced economies. Finally, changes were also experienced in reserve requirements. While the share of countries with Central Bank reserve and/or deposit requirements declined slightly from 90 percent in 2005 to 86 percent in 2010, the percentage of countries requiring their banks to hold reserves in foreign currencies or other foreign-denominated instruments increased by 10 percentage points from 25 percent in 2005 to 35 percent in 2010.<sup>14</sup> While both of these changes were mainly driven by advanced economies, a notably higher percentage of EMDEs had such requirements in place in 2005 and 2010. These findings highlight the fact that ensuring financial stability through stricter reserve requirements has been more prevalent among EMDEs relative to advanced economies.

> 13 If we limit our analysis to only those countries that have responded to both surveys – the matched sample-, the increase is larger from 43 percent in 2005 to 57 percent in 2010.

> 14 Limiting our analysis only to those countries that have responded to both surveys, the increase is somewhat smaller from 29 percent in 2005 to 36 percent in 2010.

35
# **Table A7. Liquidity and Diversification Requirements: Selected Responses**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Overview**|**% Yes**|**% Yes**|**% Yes**|
|Are there any regulatory rules or supervisory guidelines regarding asset<br>diversification?|56<br>(46)|59<br>(49)|55<br>(45)|
|Are there regulatory rules or supervisory guidelines regarding diversification of<br>fundingsources of banks' liquiditymanagement?|75|86|72|
|Are there regulatory rules or supervisory guidelines regarding contingency funding<br>plans,includingstress testingof banks' liquiditymanagement?|86|94|83|
|Is banks' liquidity management of foreign currencies requirements in place in your<br>jurisdiction?|73|71|74|
|Is regulatory minimum ratio on liquid assets (e.g. as a percentage of total balance<br>sheet or deposit base)requirements inplace inyourjurisdiction?|74|67|77|
|Is maturity mismatch/'gap' limit requirements in place in your jurisdiction?|55|63|53|
|**B.**<br>**Risk Concentration**|**% Yes**|**% Yes**|**% Yes**|
|Are banks prohibited from making loans abroad?|20<br>(9)|0<br>(3)|28<br>(11)|
|Are banks limited in their lending to a single borrower or a group of inter-related<br>borrowers?|99<br>(97)|97<br>(92)|100<br>(99)|
|**C. Reserve Requirements**|**% Yes**|**% Yes**|**% Yes**|
|Is Central Bank reserve and/or deposit requirements in place in your jurisdiction?|86<br>(90)|69<br>(76)|93<br>(95)|
|Are banks required to hold reserves in foreign currencies or other foreign-<br>denominated instruments?|35<br>(25)|26<br>(8)|39<br>(31)|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (Table 1 provides the complete list of countries).

# **Section 8: Deposit (Saving) Protection Schemes**

Section 8, including 29 questions, covers a wide variety of issues related to depositor protection schemes, such as the authority of the deposit insurance agency, the membership and coverage requirements for the deposit insurance scheme, and the depositor insurance reimbursement practices among other topics. More than three quarters of respondents reported having an explicit deposit insurance protection system for commercial banks in their jurisdictions (Table A8). Of the countries with such an explicit system, almost 80 percent have a legally separate deposit insurance agency (Figure A5). Furthermore, in 95 percent of jurisdictions, participation of domestic banks in the deposit insurance system is compulsory. However, in 51 and 71 percent of the countries the deposits at foreign branches and subsidiaries of domestic banks, respectively, are excluded from the deposit insurance system.

36
<!-- Start of picture text --> 0% 20% 40% 60% 80%<br>‘Yes<br>No- within central bank.<br>No - within banking supervision agency.<br>No - within ministry of finance.<br>Other<br>BALL mfAdvanced Developing & Emerging<br><!-- End of picture text -->
<!-- Start of picture text --> 0% 20% 40% 60% 80%<br>Expansion of coverage (types of exposures, nature of<br>depositors etc.)<br>Increase in amount covered<br>Temporary inclusion of guarantees on bank debt<br>Government guarantee of deposits and bank debts<br>Other changes<br>wAl Advanced Developing & Emerging<br><!-- End of picture text -->
# **<u>Table A8. Deposit (Saving) Protection Schemes: Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Overview and Authority**|**% Yes**|**% Yes**|**% Yes**|
|Is there an explicit deposit insurance protection system for commercial banks?|76<br>(56)|89<br>(78)|71<br>(47)|
|Does the deposit insurance agency/fund administrator have:<br>Bank examination authority as part of its mandate?<br>Authority to access information collected by banking supervisors as part of its mandate?<br>Method of failure resolution authority as part of its mandate?<br>Paybox authorityaspart of its mandate?|34<br>67<br>37<br>75|24<br>59<br>18<br>88|39<br>71<br>47<br>68|
|Does the deposit insurance agency/fund administrator have bank intervention authority as<br>part of its mandate?|27<br>(20)|18<br>(18)|32<br>(21)|
|Does the deposit insurance authority by itself have the legal power to cancel or revoke<br>deposit insurance for any participating bank?|24<br>(26)|29<br>(21)|22<br>(29)|
|**B.**<br>**Membership and Coverage**|**% Yes**|**% Yes**|**% Yes**|
|Is participation in the deposit insurance system compulsory for<br>Domestic banks?<br>Foreign bank subsidiaries?<br>Foreign bank branches?|95<br>88<br>65|97<br>97<br>53|94<br>83<br>71|
|Is foreign currency deposits excluded from deposit insurance coverage?|17<br>(21)|18<br>(28)|17<br>(17)|
|Is interbank deposits excluded from deposit insurance coverage?|77<br>(91)|79<br>(96)|75<br>(89)|
|Are deposits of the foreign branches of domestic banks excluded from deposit insurance<br>coverage?|51|38|57|
|Are deposits of the foreign subsidiaries of domestic banks excluded from deposit insurance<br>coverage?|71|85|63|
|Is the deposit insurance coverage<br>Per depositor account?<br>Per depositor? Depositor reimbursement|10<br>18|9<br>9|11<br>22|
|<br>Per depositorper institution?|81|88|78|
|**C. Depositor Reimbursement**|**% Yes**|**% Yes**|**% Yes**|
|Were insured depositors wholly compensated (to the extent of legal protection) the last<br>time a bank failed?|76<br>(79)|79<br>(79)|74<br>(78)|
|Were any deposits not explicitly covered by the deposit insurance scheme at the time of<br>failure compensated the last time a bank failed (excluding funds later paid out in liquidation<br>procedures)?|24<br>(36)|21<br>(17)|26<br>(45)|
|**D. Some More Details ...**|**Median**|**Median**|**Median**|
|What is the basic deposit insurance limit per category of insured deposits as of end of<br>2010? (2010 Thousands USD)|66|127|25|
|What percentage of the total deposits of participating commercial banks was actually<br>covered by the scheme as of end of<br>2008? (%)<br>2009? (%)<br>2010?(%)|35<br>37<br>37|52<br>53<br>54|30<br>30<br>31|
|From the time of the event's trigger, within how many days is the deposit insurance scheme<br>legally obligated to fully reimburse insured depositors?|30|20|30|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (Table 1 provides the complete list of countries).

39
# **Section 9: Asset Classification, Provisioning, and Write-offs**

With 17 questions, Section 9 highlights the fact that, at least on paper, EMDEs tend to have a more comprehensive and stricter asset classification, provision, and write-off framework than advanced economies (Table A9). For example, while 96 percent of EMDEs have an asset classification system under which banks have to report the quality of their loans and advances, only 58 percent of advanced economies report having such a system in place. Similar differences between advanced and EMDEs exist when it comes to the coverage of asset the classification system, the minimum levels of specific provisions for loans and advances, the regulatory requirements for general provisions on loans and advances, and the requirement for banks to write off non-performing loans after a specific time period. Furthermore, the median for the maximum time that a loan or advance can be non-performing before it has to be written off is 12 months among EMDEs, while this figure is 18 months for advanced economies.

Most of the questions in Section 9 were new and, therefore, it is hard to document any changes relative to the 2007 survey. The only major measurable change that is observed between the two rounds is regarding the accrued, though unpaid, interest/principal entering banks’ income statement while the loan is classified as non-performing. The share of countries responding positively to this question increased by two-folds, from 14 percent in 2005 to 28 percent in 2010, with a larger increase happening among EMDEs.

**Table A9. Asset** **<u>Classification, Provisioning, and Write-off: Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Asset Classification **|**% Yes**|**% Yes**|**% Yes**|
|Do you have an asset classification system under which banks have to report the<br>qualityof their loans and advances usinga common regulatoryscale?|86|58|96|
|Does Asset classification system:<br>Apply to all commercial banks?<br>Cover all types of borrowers (e.g. including government)?|95<br>86|77<br>73|100<br>90|
|Cover all loans and advances to a borrower?|90|69|96|
|Impose a uniform classification requirement for specific borrowers|36|12|43|
|Are banks allowed to upgrade the classification of a loan or advance immediately<br>after it has been restructured?|33|41|31|
|**B.**<br>**Provisioning and Write-off**|**% Yes**|**% Yes**|**% Yes**|
|Are there minimum levels of specific provisions for loans and advances that are set<br>bythe regulator?|71|19|91|
|Is there a regulatory requirement for general provisions on loans and advances?|63|36|73|
|Do you require banks to write off non-performing loans after a specific time period?|40|14|49|
|Does accrued, though unpaid, interest/principal enter the bank's income statement<br>while the loan is classified as non-performing?|28<br>(14)|39<br>(31)|23<br>(8)|
|If a customer has multiple loans and advances and one of them is classified as non-<br>performing,are all the other exposures classified as non-performingas well?|53<br>(50)|48<br>(35)|54<br>(55)|
|**C. Some Additional Information**|**Median**|**Median**|**Median**|
|What is the maximum time (in months) that a loan or advance can be non-performing<br>before it has to be written off?|12|18|12|
|Up to what level (if any) is specific provisions tax deductible?|0|0|1|
|Up to what level (if any) is general provisions tax deductible?|0|0|0|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (Table 1 provides the complete list of countries).

40
# **Section 10: Accounting/Information Disclosure**

Section 10 contains 16 questions related to accounting standards and information disclosure. Almost all jurisdictions (97 percent) that participated in the survey report that banks are required to prepare consolidated accounts for accounting purposes (Table A10). This represents an increase by 11 percentage points relative to 2005.<sup>18</sup> All of this increase was due to changes in the EMDEs. However, only 14 percent of countries (5 percent of advanced and 18 percent of EMDEs) report that commercial banks are required by supervisors to have external credit ratings. Regarding the disclosure practices of banks, the survey results show that, except for the case of audited financial statements, advanced economies have notably broader public disclosure practices than EMDEs. Moreover, and possibly because of the role of misleading accounting practices in the run up to the financial crisis, a slightly larger share of jurisdictions in 2010 (95 percent in 2010 compared to 89 percent in 2005)<sup>19</sup> reported holding bank directors legally liable if information disclosed is erroneous or misleading.

**<u>Table A10. Accounting/Information Disclosure: Activities: Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Overview**|**% Yes**|**% Yes**|**% Yes**|
|Are banks required to prepare consolidated accounts for accounting purposes?|97<br>(86)|97<br>(97)|97<br>(82)|
|Are commercial banks required bysupervisors to have external credit ratings?|14|5|18|
|Are all banks operating in your country (including foreign bank branches) required<br>to make available to the public their annual financial statements:<br>On an individual basis?|92|84|95|
|On a consolidated basis(if applicable)?|89|92|88|
|Do supervisors require banks to publicly disclose:<br>All fines and settlements resulting from non-compliance with regulations?|22|16|24|
|Other information not required byfinancial reportingstandards?|41|49|38|
|Are bank directors legally liable if information disclosed is erroneous or<br>misleading?|95<br>(89)|97<br>(92)|95<br>(88)|
|**B.**<br>**Disclosure Practices of Banks**|**% Yes**|**% Yes**|**% Yes**|
|Do banks disclose to the public:||||
|Full audited financial statements?|94|92|95|
|Off-balance sheet items?|78|86|74|
|Governance and risk management framework?|73|86|68|
|Regulatory capital and capital adequacy ratio?|77|86|74|
|Transactions with related parties?<br>|70|86|64|
|Any other material information?<sup>*</sup><br>|74|81|72|
|Scope of consolidation?<sup>**</sup>|76|89|71|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (see Table 1 provides the complete list of countries).

* Such as information which omission or misstatement could change or influence the assessment or decision of a user relying on that information for making decisions.

** Including reasons for not including certain entities, where appropriate.

18 If we focus on the matched sample, the increase is smaller from 90 to 96 percent.

19 If we limit our analysis to only those countries that have responded to both surveys, the gap is smaller (92 percent in 2005 and 95 percent in 2010).

41
# **Section 11: Discipline/Problem Institutions/Exit**

This section includes 19 questions in two broad sub-categories of enforcement and resolution (Table A11). Responses to this part of the survey indicate that EMDEs have a broader discipline framework. For example, more than 71 percent of EMDEs report having a separate bank insolvency framework that is distinct from that of non-financial firms, while only 57 percent of advanced economies have such a framework in place.

The survey indicates that 85 percent of all jurisdictions operate an early intervention framework (e.g. prompt corrective action) that forces automatic action when certain regulatory triggers/thresholds are breached. The survey also highlights the existence of a wide range of enforcement powers of the supervisory agencies. For example, while 100 percent of supervisory agencies in the survey have the power to require banks to enhance governance, internal controls, and risk management systems, only 76 percent of them can require banks to reduce or suspend bonuses and other remuneration to bank directors and managers. Overall, the survey shows supervisory agencies in EMDEs enjoy more enforcement powers than their counterparts in advanced economies.

Surprisingly, the median for the proportion of banking system’s assets being resolved or liquidated, remained at 0 percent between 2008 and 2010. However, the survey may underestimate the share of assets resolved or liquidated because of the regulatory delays that are part of bank resolution and liquidation procedures.

# **Table A11. Discipline/Problem Institutions/Exit:** **<u>Selected Responses</u>**

|**A. Overview**|**ALL**<br>**% Yes**|**ADV**<br>**% Yes**|**EMDEs**<br>**% Yes**|
|---|---|---|---|
|Is there a separate bank insolvency framework that is distinct from that of non-financial<br>firms?|67|57|71|
|Is the insolvency framework the same for bank holding companies and banks?|59|65|56|
|Is court approval required to:<br>Declare insolvency?<br>Supersede shareholders' rights?|53<br>35|65<br>49|48<br>31|
|Are bank regulators/supervisors required to make public formal enforcement actions, which<br>include cease and desist orders and written agreements between a bank<br>regulatory/supervisorybodyand a bankingorganization?|30|30|30|
|Does the supervisory agency operate an early intervention framework (e.g. prompt corrective<br>action) that forces automatic action when certain regulatory triggers/thresholds are<br>breached?|85|72|90|
|**B.**<br>**Mechanisms in Existing Legislation to Resolve a Problem Bank Prior to its**<br>**Closure and Liquidation**|**% Yes**|**% Yes**|**% Yes**|
|Openbankassistance|64|58|67|
|Purchase and assumption transaction(with or withoutgovernment support)|71|68|72|
|Government intervention(e.g. via conservatorshipor nationalization)|60|62|58|
|Bridge bank|38|41|37|
|**C. Enforcement Powers Available to the Supervisory Agency**|**% Yes**|**% Yes**|**% Yes**|
|Cease and desist-type orders for imprudent bankpractices?|95|94|96|
|Forbearance(i.e. to waive regulatoryand supervisoryrequirements)?|72|66|74|
|Require a bank to meet supervisory requirements (e.g. capital, liquidity etc.) that are stricter<br>than the legal or regulatoryminimum?|96|100|95|
|Require bank to enhancegovernance,internal controls and risk management systems?|100|100|100|
|Require bank to applyspecificprovisioningand/or write-offpolicies?|93|86|96|
|Require banks to constituteprovisions to cover actual orpotential losses?|97|91|99|

42
<!-- Start of picture text --> 0% 20% 40% 60% 80%<br>Introduce a separate bank insolvency framework<br>Implement coordination arrangements among<br>domestic authorities<br>Other changes<br>MAI Advanced © Developing & Emerging<br><!-- End of picture text -->
<!-- Start of picture text --> 0% 20% 40% 60% 80"<br>The Central Bank.<br>Asingle bank supervisory agency<br>Multiple bank supervisory agencies including<br>the Central Bank<br>Multiple bank supervisory agencies excluding<br>the Central Bank<br>Other<br>MAll Advanced Developing & Emerging<br><!-- End of picture text -->
<!-- Start of picture text --> 0% 20% 40% 60% 80%<br>Systemic’financial stability<br>Market conduct<br>Consumer protection<br>Prevention of financial crime<br>Campetition/antitrust policy<br>Financial market access/development<br>Deposit insurance<br>Bank restructuring/resolution<br>BAI mg Advanced Developing & Emerging<br><!-- End of picture text -->
<!-- Start of picture text --> 90.0%<br>80.0%<br>70.0%<br>60.0%<br>30.0%<br>40.0%<br>30.0%<br>20.0%<br>10.0%<br>0.0%<br>On-site inspections Relying on Host country supervisors<br>gAl mg Advanced Developing & Emerging<br><!-- End of picture text -->
# **<u>Table A12. Supervision: Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Legal Authority of Supervisory Agency**|**% Yes**|**% Yes**|**% Yes**|
|Are there anybanks that are not under thejurisdiction of this agency?|11|11|12|
|Can the supervisoryauthorityforce a bank to change its internal organizational structure?|90|92|89|
|Is the body/agency in charge of supervising banks also responsible for the supervision of the:<br>Insurance sector?|47|76|35|
|Securities sector?|34|64|22|
|Pension funds?|33|43|28|
|Does the supervisory agency need to obtain approval from the government in order to:<br>Issue binding secondary regulations for the banking sector?<br>Determine its budget?|24<br>33|34<br>49|20<br>27|
|Obtain funding?<br>Hire and fire senior staff?|28<br>11|40<br>6|23<br>13|
|Define salaries and benefits structure of staff?|24|17|26|
|Define its organizational structure?|14|9|16|
|Can individual supervisory staff be held personally liable for damages to a bank caused by<br>|17|3|23|
|their actions or omissions committed in thegood faith exercise of their duties?|(20)|(11)|(24)|
|Can the supervisory agency be held legally liable for damages to a bank caused by its<br>actions?|53<br>(51)|59<br>(51)|51<br>(49)|
|**B.**<br>**Systematic Supervision and Financial Stability**|**% Yes**|**% Yes**|**% Yes**|
|Is there a specialized department dealingwith financial stabilityand systemic supervision?|66|44|74|
|Isyour agencyresponsible forpublishinga financial stabilityreport?|58|42|64|
|Doyou conduct stress test aspart of theprocess of assessingsystemic stability?|80|82|80|
|Doyou supervise systemic institutions in a different waythan non systemic ones?|47|61|42|
|In order to dampen boom/bust cycles in credit flows:||||
|Do you have counter-cyclical capital requirements?|9|20|5|
|Do you have counter-cyclical loan to value ratios?|7|9|6|
|Do you have counter-cyclical provisioning requirements?|19|12|21|
|Do you have granular capital requirements based on loan to value ratios?|12|27|6|
|Doyou have temporaryrestrictions on dividend and bonuses distribution?|27|34|24|
|To oversee more closely and/or limit the activities of large/interconnected institutions:<br>Are additional capital requirements employed?|39|50|33|
|Are additional liquidityrequirements employed?|30|41|23|
|Are asset/risk diversification requirements employed?|33|36|31|
|Are restrictions/limits on activities employed?|41|48|38|
|Are restrictions/limits on size of institution employed?|19|23|17|
|Are additional corporate taxes for large institutions employed?|3|9|0|
|Is closer or more frequent supervision employed?|89|100|83|
|Are restrictions on thegroup's legal structure employed?|23|29|21|
|**C. Supervisory Staff**|**% Yes**|**% Yes**|**% Yes**|
|Does the head of the supervisory agency have a fixed term?|80<br>(76)|78<br>(72)|80<br>(77)|
|Is there a maximum number of terms?|29|29|30|
|**D. Some More Details ...**|**Median **|**Median **|**Median **|
|How long (in years) is the term of the head of the supervisory agency?|5<br>(5)|5<br>(5)|5<br>(5)|
|How manyterms arepermitted for the head of the supervisoryagency?|2|2|2|
|What % of the bank supervisors have more than 10years experience in bank supervision?|36|37|35|
|What is the average tenure of banking supervisors?|8<br>(7)<br>|7.5<br>(7)<br>|8.5<br>(7)<br>|
|How many onsite examinations per bank were performed in the last 5 years (2006-2010)?|4<br>(3.5)|2<br>(2.5)|5<br>(4)|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (see Table 1 provides the complete list of countries).

47
# **Section 13: Banking Sector Characteristics**

Section 13 of the 2011–12 survey asked about quantifiable characteristics of the banking sector such as size, structure of the banking sector, performance, and asset and liabilities composition. It has 27 quantitative questions where respondents were requested to enter a value for any given question (Table A13). Although, there is no equivalent section in the previous round of the survey in 2007, some of the questions in section 13 of the 2011–12 survey could be located in other parts of the 2007 survey. Two immediate observations and comparisons can be made. First, bank concentration is quite high both in advanced economies and EMDEs alike. The median share of assets held by the largest five banks is about 75 percent across all countries. Such a high level of concentration, as we saw with financial crisis, may lead to “too big to fail” scenarios and, therefore, may distort the incentives of the senior management of these large institutions. Second, the median fraction of banking system's assets in foreign-controlled banks increased notably from 39 percent to 49 percent. Finally, some of the quantitative questions were excluded from the published version of the survey due to issues of comparability. Those questions tend to cover topics where consistent cross-country data are already available (such as total banking system assets) are indicated by an asterisk in the questionnaire accompanying the dataset at http://www.worldbank.org/financialdevelopment.

**Table A13. Banking Sector Characteristics: Selected Responses**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. Overview**|**Median**|**Median**|**Median**|
|How many commercial banks were there at the end of:<br>2010?<br>2005?|24<br>(23)|54<br>(52)|19<br>(20)|
|Of commercial banks in your country, what % of total assets was held by<br>the five largest banks at the end of :<br>2010?<br>2008?|73<br>74|73<br>74|73<br>73|
|Of commercial banks in your country, what % of total deposits was held by<br>the five largest banks at the end of:<br>2010?<br>2008?|75<br>75|72<br>75|75<br>74|
|What % of the commercial banking system's total gross income was in the<br>form of non-interest income in at the end of:<br>2010?<br>2008?|32<br>31|36<br>31|30<br>31|
|What % of the banking system's assets was government-controlled banks<br>(e.g., where government owned 50% or more equity) at the end of:<br>2010?<br>2005?|8<br>(4)|1<br>(0)|13<br>(10)|
|What % of the banking system's assets was foreign-controlled banks (e.g.,<br>where foreigners owned 50% or more equity) at the end of:<br>2010?<br>2005?|49<br>(39)|35<br>(21)|49<br>(43)|
|What was the ratio of specific provisions to gross non-performing loans in:<br>2010?<br>2008?|47<br>46|35<br>36|49<br>54|
|What was the ratio of general provisions to total gross loans at the end of:<br>2010?<br>2008?|1<br>1|0.8<br>0.5|2<br>1|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey, which reflects values as of 2010. Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey, which captures data as of 2005. ADV: advanced economies, EMDEs: emerging and developing economies (see Appendix I for list of countries).

48
# **Section 14: Consumer Protection**

This section is new to the survey, it has been added in the current survey round. Issues related to consumer protection did not receive any attention in previous rounds of the survey. With 14 questions, this part of the survey highlights various aspects of consumer protection schemes around the world. Depending on the regulation, between one-third to two-third of jurisdictions participating in the survey reported having different requirements in place in order to protect the interest of consumers (Table A14). For example, 66 percent and 51 percent of jurisdictions have laws that restrict deceptive advertising and unfair or high-pressure selling practices, respectively. Furthermore, while 69 percent of agencies have the authority to issue warnings to financial institutions, only 33 percent of them require providers to refund excess charges. About 60 percent of agencies can impose fines and penalties and 41 percent of them can withdraw the offending provider’s license to operate. Therefore, consumer protection schemes around the world are not as strong as perhaps consumers would desire.

While the majority of responses are more-or-less comparable between advanced economies and EMDEs, for two questions the differences are particularly large. First, while 70 percent of jurisdictions in advanced economies reported that in order to enforce consumer protection laws they could issue public notices of violation, only 28 percent of EMDEs reported having such authority. Second, only 34 percent of the EMDEs reported having the power to withdraw the offending provider’s license to operate, while 57 percent of advanced economies did so. These may be linked to the level of transparency in the political structure (higher transparency in the advanced economies) and the level of government ownership of the financial sector (more government ownership in the EMDEs).

49
# **<u>Table A14. Consumer Protection: Selected Responses</u>**

||**ALL**|**ADV**|**EMDEs**|
|---|---|---|---|
|**A. In Order to Enforce Consumer Protection Laws and Regulations:**|**% Yes**|**% Yes**|**% Yes**|
|Your agencycan issue warnings to financial institutions.|69|71|67|
|Your agencycan requireproviders to refund excess charges.|33|26|35|
|Your agencycan requireproviders to withdraw misleadingadvertisements.|56|66|52|
|Your agencycan impose fines andpenalties.|59|54|59|
|Your agencycan issuepublic notice of violations.|41|71|28|
|Your agencycan withdraw the offending provider’s license to operate.|41|57|34|
|**B.**<br>**By Law or Regulation, the Following is Part of the Disclosure**<br>**Requirements that Banks Need to Comply with Upon Signing any**<br>**Financial Product Contract:**|**% Yes**|**% Yes**|**% Yes**|
|Plain language requirement (Clear and simple language that can be readily understood<br>byanycustomer).|61|64|60|
|Local language requirement.|49|50|48|
|Prescribed standardized disclosure format(e.g.,one-page "KeyFacts" document).|37|47|33|
|Clearlyspell out recourse rights andprocesses.|50|53|49|
|**C. By Law or Regulation, the Following is Part of the Disclosure**<br>**Requirements that Banks Need to Comply with Upon Signing a Deposit**<br>**Contract:**|**% Yes**|**% Yes**|**% Yes**|
|Annualpercentageyield and interest rate.|66|58|69|
|Method of compounding.|47|46|47|
|Minimum balance requirements.|50|44|52|
|Fees andpenalties.|62|61|62|
|Earlywithdrawalpenalties.|59|61|57|
|**D. By Law or Regulation, the Following is Part of the Disclosure**<br>**Requirements that Banks Need to Comply with Upon Signing a Credit**<br>**Contract:**|**% Yes**|**% Yes**|**% Yes**|
|Annualpercentage rate usinga standard formula.|64|53|69|
|Fees.|66|56|71|
|Computation method(average balance,interest).|53|47|56|
|Required insurance.|46|42|48|
|**E.**<br>**By Law or Regulation, the Following is Part of the Disclosure**<br>**Requirements for Periodic Statements for Deposit Products:**|**% Yes**|**% Yes**|**% Yes**|
|Annualpercentageyield calculated usinga standard formula.|37|36|38|
|Amount of interest earned.|44|39|46|
|Fees imposed.|42|42|42|
|Account balance.|49|39|53|
|**F.**<br>**By Law or Regulation, the Following is Part of the Disclosure**<br>**Requirements for Periodic Statements for Credit Products:**|**% Yes**|**% Yes**|**% Yes**|
|All transactions concerningthe account for theperiod covered bythe statement.|51|53|50|
|Annualpercentage rate(applied duringtheperiod).|48|44|49|
|Interest charged for theperiod.|55|50|57|
|Fees charged for theperiod.|54|47|57|
|Minimum amount due.|44|42|45|
|Date due.|48|50|48|
|Outstandingbalance.|48|50|48|
|**G. Specific Provisions in the Existing Laws and Regulations Restrict:**|**% Yes**|**% Yes**|**% Yes**|
|Deceptive advertising.|66|78|62|
|Unfair or high-pressure selling practices.|51|68|44|
|Abusive collectionpractices.|42|50|38|
|Unauthorized use of client data or breach of client confidentiality.|70|78|67|

Source: Calculations based on the 2011–12 Bank Regulation and Supervision Survey. Notes: ADV: advanced economies, EMDEs: emerging and developing economies (Table 1 provides the complete list of countries). Values in parentheses refer to the 2007 Bank Regulation and Supervision Survey.

50