Public Disclosure Authorized Public Disclosure Authorized w___ __ POLICY RESEARCH WORKING The Regulation and Supervision of Banks around the W orld around W the orld PAPER __ AS 25 8 8 This new and comprehensive database on the regulation and supervision of banks in 107 countries should better ~~~~~~~~~~~inform advice about bank Public Disclosure Authorized Public Disclosure Authorized regulation and supervision A New Database and lower the marginal cost of empirical research. James R. Barth Gerard Caprio Jr. Ross Levine The World Bank Development Research Group Finance and FinancialSectorStrategyand PolicyDepartment April 2001 H POLICY RESEARCH WORKING PAPER 2588 Summary findings International consultants on bank regulation and supervision for developing countries often base their advice on how their home country does things, for lack of information on practice in other countries. Recommendations for reform have tended to be shaped by bias rather than facts. To better inform advice about bank regulation and supervision and to lower the marginal cost of empirical research, Barth, Caprio, and Levine present and discuss a new and comprehensive database on the regulation and supervision of banks in 107 countries. The data, based on surveys sent to national bank regulatory and supervisory authorities, are now available to researchers and policymakers around the world. The data cover such aspects of banking as entry requirements, ownership restrictions, capital requirements, activity restrictions, external auditing requirements, characteristics of deposit insurance schemes, loan classification and provisioning requirements, accounting and disclosure requirements, troubled bank resolution actions, and (uniquely) the quality of supervisory personnel and their actions. The database permits users to learn how banks are currently regulated and supervised, and about bank structures and deposit insurance schemes, for a broad cross-section of countries. In addition to describing the data, Barth, Caprio, and Levine show how variables may be grouped and aggregated. They also show some simple correlations among selected variables. In a companion paper ("Bank Regulation and Supervision: What Works Best") studying the relationship between differences in bank regulation and supervision and bank performance and stability, they conclude that: * Countries with policies that promote private monitoring of banks have better bank performance and more stability. Countries with more generous deposit insurance schemes tend to have poorer bank performance and more bank fragility. * Diversification of income streams and loan portfolios-by not restricting bank activities-also tends to improve performance and stability. (This works best when an active securities market exists.) Countries in which banks are encouraged to diversify their portfolios domestically and internationally suffer fewer crises. This paper-a product of Finance, Development Research Group, and the Financial Sector Strategy and Policy Department-is part of a larger effort in the Bank to compile data on financial regulation and supervision and the advise countries on what works best. The study was funded by the Bank's Research Support Budget under the research project "Bank Regulation and Supervision: What Works and What Does Not." The companion paper and data may be downloaded at www.worldbank.org/research/projectslbank_regulation.htm). Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Agnes Yaptenco, room MC3-446, telephone 202-4738526, fax 202-522-1155, email address ayaptenco@'worldbank.org. Policy Research Working Papers are also posted on The authors may be contacted at jbarth@business.auburn.edu, the Web at http://econ.worldbank.org. gcaprio@worldbank.org, or rlevine@csom.umn.edu. April 2001. (87 pages) 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 lessthan fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Produced by the Policy Research Dissemination Center The Regulation and Supervision of Banks Around the World A New Database James R. Barth Gerard Caprio, Jr. and Ross Levine* * James R. Barth, Lowder Eminent Scholar in Finance, Auburn University and Senior Finance Fellow, MilkenInstitute (ibarth@business.aubum.edu);Gerard Caprio,Jr., Director, Financial Strategy and Policy Group and Manager,Financial SectorResearch, World Bank (gcaprio@worldbank.org);Ross Levine, Carlson School of Managementat the University of Minnesota (rlevine@.csom.umn.edu). Commentson the data (and a related paper) from George Kaufmanand other participantsat the January 2001 Brookings-WhartonPapers on Financial Services,4h Annual Conference,"IntegratingEmergingMarketCountriesInto Global Financial System," are gratefullyacknowledged. This research could not have been completedwithout the help of Iffath Sharif and Cindy Lee, as well as financial support from the World Bank's Financial Sector Board and the Research Committee. Xin Chen provided extraordinaryresearch assistance. The authors wishto acknowledgethe assistanceof the Basel Committeeof Bank Supervisorsand the Financial StabilityForum WorkingGroup on Deposit Insurance. I. Introduction Notwithstandingall the accomplishmentsin the fieldsof finance and financialeconomics in the last two decades, if a survey were taken of all the internationalconsultantson appropriatebank regulationand supervisionfor developingcountries,what would be the best way to predict the advice they would offer? Anecdotalevidenceaccumulatedover the years suggeststhat an astonishinglyhigh degree of accuracy could be obtained merely by knowing each consultant's country of origin: experts almost always view their own regulatory and supervisoryframework as an appropriatemodel for developingcountries. Beyond some inevitable 'home bias,' what would explain such a good fit? The answer is that until now there was no systematically assembleddatabase on the way in which countriesregulate and supervisetheir bankingsystems, and thus no comprehensiveanalysis of which regulatoryand supervisorypracticesare most appropriate. This ignorance of the facts provides fertileground for reform recommendations based instead on bias. To contributeto a better understandingof bank regulatory and supervisoryregimes, this paper presents and discussesa new and comprehensivedatabasebased upon a surveysent to national bank regulatory and supervisoryauthorities. These data are available to researcherson the World Wide Web.' For the first time, the data enable one to identifythe existing regulation and supervisionof banks (and selectivefeatures of bank structureand deposit insurance schemes)in 107 countriesat all levels of income and in all parts of the world.2 With this database one can now determinemore fullythe "stylizedfacts" for banking on a global basis. This databasecan be found at the World Bank's website for financialsectorresearch, http://www.worldbank.org/research/interest/intrstweb.htm, under the heading 'Data.' 2 Admittedly,some individualshave assembled significant"bits and pieces" of this type of database for selected countries. But there has been no truly broad and detailed database from official sourcesthat would enable one to assess as many different and importantaspectsof the banking systems for as many countries as presented and discussedhere. 2 Most importantly,we compiledthese data to lower the marginalcost of doing empirical research on bank regulationand supervision. We expect these data and the ensuing research to provide a much firmer foundationfor policy reforms. In a companion paper [Barth,Caprio, arid Levine, 2001], we use these data to identify those regulatoryand supervisorypracticesmost closely associatedwith better bank perfoirmanceand more stability. This effort is clearly a beginning,not an end. The remainderof the paper proceedsas follows.The next section describesthe data and how they were obtained. It also drawsupon our new and comprehensivedatabase to provide a selective overviewof some of the importantways in which banking systems differ across countries. The third sectiondiscussesand examinesways to group and aggregate variables from this dataset to providea potentiallymore meaningfulcharacterizationof a country's banking system. It also discussesways in which these variablesmay be, if not already, quantifiedto better assess the degree to which countriesdiffer.3 The fourth section provides a descriptionoithe differences in the variables when countriesare aggregatedby income level or region,and also presents some correlationsamong key variables. The final section concludeswith some early and illustrative findings (Barth,Caprio, and Levine, 2001) using this database. II. Survey and Data In 1998we designedand then implementeda survey funded by the World Bank to collect detailed and comprehensiveinformationon the regulationand supervisionof commercialbanks in as many countriesas possible.4 We also requested informationon selectedaspects of bank quantificationis also importantin assessingthe relationshipbetween different features of a banking system and various financial and economicoutcomesas discussed in the final section. 4 We started the process with Joaquin Gutierrez's (formerlyof the World Bank and now with the Central Bank of Spain) detailed questionnaireand then supplementedit basedupon significantadvice from bank supervisorsat the World Bank. Both David Scott and Vincent Polizatto have extensiveexperience in emerging markets and thus were 3Such 3 structure and deposit insuranceschemes. The formulationand completionof the survey entailed a number of inter-relatedsteps. The Basel Committeeon Banking Supervisionprovided us with informationso that we could contactappropriateindividualsat nationalregulatory and supervisoryagencies. Furthermore,since the WorldBank routinely conductsseminars for bank supervisorsfrom emergingmarket countries,we asked participantsat these sessionsto complete the survey. In some cases, WorldBank personneltravelingto countriesthat had not yet responded to the survey deliveredthe surveyto the appropriateofficials. Despite these efforts, there were problems. All countries did not respondto the survey.5 Also, officials from the same countryor even the same agency sometimesprovidedconflicting answersto the same questions. Thus, we had to follow-upwith authoritiesto resolve these issues. In addition, the Office of the Comptrollerof the Currency(OCC)conducted a much narrower survey that nonethelessoverlapswith a subsetof the informationwe collected. Consequently,we checked responsesfrom the two surveysand attemptedto reconcile any 6 The Financial Stability Forum's Working Group on Deposit Insurance also inconsistencies. provided input on the accuracy of responsesregardingcertain individualcountry's deposit insuranceschemes.Most of the informationfrom the responsesis for 1999.7 The survey is comprisedof twelve separate parts, with about 175 questions,covering the followingaspectsof a country'sbanking system: *Entry into banking particularlyimportantin this regard. We next condensedthe survey to a manageableform after adding questions related to economicincentives and vetting it with other banking expertsas well as those skilled in conducting surveys. We also simplified the survey after receivingfeedback from a few countries early in the process to reduce ambiguities and facilitateaccurate responses. The authors,of course, retainsole responsibilityfor the final form of the survey. Responses were receivedfrom 107 countries.However, many of these countries did not respond to each and every question. More informationabout the responserate to differentquestionsis presentedbelow. This overlap and checkingonly affected selected activityand ownershipvariables as indicated below. We also checked our data with informationcollectedby the Instituteof InternationalBankers. 4 *Ownership * Capital • Activities *External auditing requirements * Internalmanagement/organizationalrequirements *Liquidity and diversificationrequirements *Depositor (savings) protectionschemes *Provisioningrequirements * Accounting/informationdisclosurerequirements *Discipline/probleminstitutions/exit,and * Supervision Since our database is readily available on the web,8 the remainderof this sectionprovides a sampleof the informationwe have collected and assembledinto more useable form. Tables 1 and 2 providean overviewof some basic differencesin bankingsystemsfor 107 countries at all levels of income and in all parts of the world. This informnation covers the administrative structureof bank supervision,selectiveaspectsof the bankingindustry, and the regulatory and supervisoryenvironmentin which banks operate. Table I shows what body or agency supervisesbanks, whether there is more than one supervisorybody, and to whom supervisorybodies are responsibleor accountable.Of 107 countries, 89 have a single supervisorybody and 18 countrieshave two or more. Of those countrieswith only one supervisorybody, moreover,in about two-thirds of the cases it is the central bank. Furthermore,with respect to whomthe supervisorybodies are responsibleor accountable,it is usuallythe finance ministry.This type of administrative-structureinformation Of the 107 responsesreceived, 13 were received in November 1998, 65 were received in 1999, and 29 in 2000, with 19 of the latter receivedin either Januaryor February. s See footnote 1 for the location. Those without access to the web can contact Agnes Yaptenco(The World Bank, 1818H St., N.W., Washington,D.C. 20433, 202-473-1823,fax: 202-522-1155;Ayaptenco@worldbank.org). 7 5 is helpful in assessingwhetherthe number,locationand independenceof supervisorybodies matters, in additionto its benchmarkingvalue. Table 2 shows the differencesin the size and structureof the bankingindustry. It also shows the extent to which overall bank activities are restricted. Furthermore,informationis provided on the number of professionalsupervisorsper bank and whether supervisorsare legally liable for their actions. The table shows, moreover,whetherthere is an explicit deposit insurance scheme. Lastly, informationon the degreeto which the biggestbanks are rated by international rating agencies is provided. This type of data is very importantin understandingwhat the term "bank" signifiesin different countries as well as in assessingwhat matters for the performance and stabilityof a country's banking industry,and ultimatelyfor overall financial and economic activity. There are two measures of the size of a country's bankingindustry in Table 2. One measure is total bank assets as a percentageof GDP. 9 A second measure is the numberof banks per 100,000people. Both of these measuresshow substantialvariation across countries,even when excluding countries with offshorebankingcenters. Two countriesthat many point to when emphasizingdifferences in banking industriesand in ways of regulatingbanksl' are Germany and the U.S. As may be seen, total bank assets as a percentageof GDP are 313 percent in Germany,but a much lower 66 percent in the U.S. It is in largepart due to these figuresthat Germany is described as havinga bank-basedfinancialsystem,while the U.S is describedas havinga capital market-basedfinancial system.At the same time, however,the number of banks per 100,000people is about the same in the two countries.Yet, the latterfigures for both 9The informationon total bank assets is obtained from the OCC survey. 10Germanbanks are frequentlyreferred to as "universal"banks because of the wide range of activities in which they are allowed to engage. In this regard, comparethe position of Germanyrelativeto the U.S. (andother countries ) in Figure 6. The differencesbetween Germanyand the U.S. with respect to regulationsregarding the activities in which banks may engage have narrowedsignificantlyas a result of a change in banking law in the U.S. in late 1999. 6 Germany and the U.S. are considerablyhigherthan the correspondingfigures for most other countries. Table 2 indicatesthat there is substantialvariationin the bank structurevariables across countries.There are three types of structuralvariables:(1) the percentageof deposits accounted for by the 5 largestbanks; (2) the percentageof total assets that are governmentowned; and (3) the percentageof total bank assets that are foreign owned.The concentrationmeasure for the U.S. is relatively low at 21 percent as comparedto every other economyexcept Germany, Guyana, and Taiwan (China).The degreeof concentrationis quite high even in some countries that have many banks, such as Russia with more than 1,300banks but also a 5 bank concentrationfigure of 80 percent. As regards governmentownership,there are a large number of countries for which the share of total bank assets accountedfor by government-ownedbanks is not only positive but also fairly high. In nine countriesthe figure exceeds60 percent.In Indiathe figure is 80 percent. Germanyhas a figure that is much lower than this but still relativelyhigh at 42 percent. At the other end of the spectrumare countries like the U.K. and the U.S. for which the governmentownershipfigures are zero percent. The share of total commercialbank assets accountedfor by foreign-ownedbanks also displays wide variation,ranging from a low of zero percent in India to a high of 99 percent in New Zealand.The latter countryhas essentially"outsourced"its entire banking industry. Germany,the U.S., and Japan all report relatively low figures of 4, 5 and 6 percent, respectively. Some countrieshave laws limitingentry by foreign banks, as will be discussed later, which helps account for some of these differences across countries.It might be noted that among the European Union (EU) countrieslisted in the table, consolidationacross national borders is still relativelymodest. 7 A particularly importantvariablein Table 2 is labeledOverall Bank Activities and OwnershipRestrictiveness. More will be said aboutthe exact way in which this variable is constructed in the next section. For now it is enough to say that it measuresthe overall degree to which banks are permittedto engage in securities,insuranceand real estate activities as well as to own nonfinancialfirms. It ranges in value from 1to 4. The lowest value indicatesthat no restrictions are placed on this type of diversificationby banks, whereasthe highest value indicatesthat such diversificationis prohibited.This particularvariable largely defineswhat is meant by the word "bank".Given the substantialvariation in this variable amongcountries, it is clear that a bank is not the same thing in differentcountries.Countrieslike Germany(1.3) and New Zealand (1.0) allowtheir banks unrestrictedaccessto this type of diversification.Other countries like China (3.5) and Indonesia(3.5) are severelyrestrictive.Even Japan and the U.S were quite restrictiveuntil very recentlywhen changesin banking laws and regulationswere made. More generally,this variable clearly indicatesthat the regulatory environment,not just unfetteredmarket forces, importantlydetermineswhat banks in different countriesaround the world may do. Table 2 also showsthat the supervisoryenvironmentvariables vary substantiallyamong countries.Although only two variables are presented in the table - Supervisorsper Bank and Are SupervisorsLegallyLiable for Their Actions-they are indicativeof the types of differencesthat exist. Some economieshave relativelyhigh ratios of professionalsupervisorsper bank, such as Taiwan (China)with 18 and Honduraswith 12. Others like the U.S. and Turkeyhave relatively low ratios, which are 0.1 and 0.4, respectively.As regards holdingsupervisorslegally liable for their actions, countriesare fairly evenly split,with 42 countries (includingArgentinaand Brazil) doing so and 56 countries not doing so (such as the U.K. and U.S.). 8 It is clear from Table 2 that there are a relatively largenumber of countriesthat do not yet have an explicit deposit insurancescheme. Indeed,of the 107countries, 50 do not have a scheme."I Presumably,depositors in countrieswithoutone must monitorclosely the banks in which their funds reside. To assist in monitoring,internationalcredit rating agencies rate the bigger banks in some countries.The extent to which this is done is indicatedin the table by the variablenamed Percentageof the 10 BiggestBanks Rated by InternationalAgencies.The percentagediffers significantlyamong the countries,with many reportingthat no banks are rated and also many reportingthat all banks are rated. In Cambodiano banks are rated, whereas in Botswana all banks are rated. And in Chile 50 percent of the ten biggest banks are rated. These examples nicely illustratethe type of diversitythat exists. Some pictureshelp depict the high degree of cross-countryvariation in the data. Figure 1 shows the dramatic divergencesin what banks can do, and whetherthey can own or be owned by nonfinancialfirms. Clearly, individualcountriescan 'mix and match' from these individual categories,but even at an aggregatelevel, the degree of dispersion is notable. The most restrictedbank activity among countriesis real estate and the least restrictedis securities. Indeed, in the 107countries, 37 percent prohibitreal estate activities,whereas only 7 percent prohibit securities activities.'2 The way in which the mixing of bankingand commerce is treated also indicatessignificantdifferencesacross countries.Interestinglyenough, a much higher percentage of countries(36 percent) permit unrestrictedownershipof banks by nonfinancialfirms than bank In the World Bank database on deposit insurance,which is believedto be the most comprehensive,about 70 countries have explicit deposit insuranceas of 2000, out of approximately200 countries. 12It is clear that most countries consider securitiesactivitiesto be much more acceptablebanking activities than either insuranceor real estate activities. Until the enactmentof the Gramm-Leach-BlileyAct on November 12, 1999, this was also the case in the U.S. Now securitiesand insuranceactivitiesare treated equally as unrestricted activities, with only real estate activities remainingseverely restricted. " 9 ownershipof nonfinancialfirms (13 percent). More generally,it is clear that the mixing of banking and commerce is prohibited in a relatively small percentageof the 107 countries. Banks differ dramaticallyalso in their size relativeto the economy(Figure 2). In some countries, such as the U.S., the relatively small size of bankingreflects the developmentof other forms of intermediation,but in many more it simplydepictsthe underdevelopmentof the financial sector. Bank concentrationalso differs dramatically(Figure 3): in small economies,the 5 largest banks account for all or almost all deposits,while in larger economiesthey control far less of the market for deposits. Ownershipof banks by governments(Figure 4)13and by foreignentities (Figure 5) could hardly vary more. Figure 6 shows the variationin overall restrictiveness,mentionedabove. Capturing the way bank supervisors operate is challenging - more on this below -- but Figure 7 gives one a sense that there are real differenceshere: from Taiwan (China),where there are 18 supervisorsper bank, to the U.S., CaymanIslands,and the Maldives,where there are 10 or more banks per supervisor. Marketor private monitoringalso is complex- again, more below - but Figure 8 shows the presence of internationalrating agencies- those which might be more likely to operate at arms length from their clients- covers a wide range. All the figuresjust discussedreveal substantialvariationacross countries.Lest one concludethat this is the case for each and everyvariable in our database, we direct the reader to Figure 9. This figure showsthe minimumrisk-basedcapital requirementfor banks among countries.Clearly, there is not the variationshown in the other figures.Of 106 countries, 60 Researcherswho have employeddata on foreignownershipfrom Bankscopeundoubtedly know that this series differs significantlyfrom that source in numerouscases. The variable reported here defines foreign ownership as 50% or more control, and our responsesare the views of supervisoryagencies,whereasBankscopedata are based on survey responsesfrom individualbanks. This creates biases dependingupon which types (i.e., governmentowned, domestic, privateowned, or foreign owned)and number of banks respond. 13 10 percent set the minimumrequirementat 8 percent and another 14 percent set it at 10 percent. 14 Not surprisingly,given this lack of variation,when countrieswere asked in the survey whether the minimumcapital requirementwas in line with Basle guidelines,of 107countries, 93 percent answered yes. Such near unanimityacross so manycountrieswith differences in bank risk exposure obviously reinforcesquestionsabout the accuracy and usefulnessof these guidelines at an aggregatedlevel. Figure 10, moreover,shows that, of 92 countries,in 96 percent of them the actual capital-to-assetratio equals or exceedsthe requiredminimum.15 The fact that these particularratios are not necessarilycomparablefrom one countryto the next, however, only reinforcesthe previous concern about accuracy and usefulness.The reason for the lack of comparabilityis that based upon our database selecteditems are deducted from capital in some countries, while in others they are not before the ratio is calculated.Of 104 countries,for example,57 deduct the market value of loan losses not yet realized,whereas the remaining47 do not. Our database helps alert one to some of these types of potentialpitfalls when comparing variables across countriesand hence to avoid drawing inappropriateconclusions. Table 3 contains summaryinformationabout selectedvariables that we analyze further below.'6 It also indicatesthe numberof countriesupon which the variables are based. Lastly, it groupsand aggregates(after quantificationin many cases) the informationinto different headings,a discussionof which we now turn. Japan is excluded from this count and the figure. It reports an 8 percent requirementfor internationalbanks. is excluded from this count and the figure. It reports a ratio of 11.8 percent among internationallyactive banks. 16 Appendix I contains informationon selected other variablesin our database either not mentioned in this paper or mentionedonly in passing, and Appendix2 contains a list of the questions(in abbreviated form) from the survey. 14 15 Japan 11 III. Grouping, Aggregating and Quantifying the Data All the individualresponsesin the survey may be of interest in their own right, especially for authoritieswho want to compareparticular featuresof their own bankingsystem with those in other countries.Policy makers who want to know the general directionin which to proceed with reforms, such as whetherto emphasizebank activity restrictions,capital requirements,bank supervision,or private monitoring,however,will appreciatea greater degree of grouping and aggregation(and thus quantification)of the variables,as will empiricalresearchersbound by degrees of freedom(and a need for quantifiablevariables). It is importantto make clear, however, that there is no unique groupingor aggregation(or even quantification). Further considerationon our part and reactionto commentsreceivedfrom others no doubt will lead to modificationsin the exact variablesput into various groupsand the specific variables that are aggregated(or the specific quantificationof variables). Indeed,it should be noted at the outset that some of the variables are grouped under one headingwhen they could alternativelybe grouped under another.A case in point is the Certified Audit RequiredVariable, which indicateswhether or not an external audit by a licensed or certified auditor is a compulsoryobligationof banks. We have includedthis variablewith the Private MonitoringVariables. But to the extent that supervisoryauthoritiesrequire and rely upon such audits this variablecould also be easily viewed as one of the Official SupervisoryAction Variables. This means that one must not place undue emphasisat this stageon the specific headings under which all the different variablesare listed. That said, the groupingsshown in Table 3 reflect our judgementof sensibleways in which to view the data, knowing full well that some variablesmay actually belong under more than one of the headings, or even a new heading not yet listed. 12 To assist the reader in better understandingthe meaning and interpretationof the specific variables indicated in Table 3 , we now attemptto explain more fullytheir construction, quantificationand importance. This is done by followingthe order in which the variables are listed in the table. 1. Bank Activity Regulatory Variables. There are three regulatory variablesthat affect importantactivities in which banks may engage. The three variables involve securities, insurance and real estate activities. We specificallymeasurethe degree to which the nationalregulatory authoritiesin countriesallow banks to engage in the followingthree feebased rather than more traditionalinterest spread-basedactivities: (a) Securities:the abilityof banks to engage in the businessof securitiesunderwriting, brokering,dealing, and all aspectsof the mutual fund industry. (b) Insurance: the abilityof banks to engage in insuranceunderwritingand selling. (c) Real Estate:the abilityof banksto engage in real estate investment,development, and management. The World Bank and OCC surveysprovidedinformationin responseto a series of individualquestions regardingeach country's regulationsconcerningthese activities. Using this information,we quantifiedthe degree of regulatoryrestrictivenessfor each aggregate or composite activity on a scale from 1 to 4, with largernumbers representinggreater restrictiveness. The definitionsof the 1 through 4 designationsare as follows: (1) Unrestricted- A full range of activities in the given category can be conducted directly in the bank. (2) Permitted- A full range of activities can be conducted,but all or some must be conducted in subsidiaries. (3) Restricted- Less than a full range of activitiescan be conducted in the bank or subsidiaries. (4) Prohibited- The activity cannot be conducted in either the bank or subsidiaries. The difference between a I and 2 indicatesonly the locations in which the activity may be conducted,not whether the activity is restrictedin any way. This type of difference, 13 however, may matter for various measuresof bankingindustryperformance as well as bank stability. Indeed,there has been considerablecontroversyover which organizational structureis most appropriatefor different bank activitiesto better ensure a safe and sound banking industry. More generally,thesetypes of regulationsdeterminethe degreeto which a bank may diversify its businessoperationsas well as to attempt to capitalizeon any synergies that may arise from complimentaryactivities. 17 Figure 1, which was mentioned earlier, shows the variationamongcountries with respect to the degree to which each of these three activities is restricted. 2. Mixing Banking / CommerceRegulatory Variables. We constructedtwo aggregate variables to measure the degreeof regulatory restrictivenesson the mixing of bankingand commerce. We once again quantifiedthe regulatoryrestrictivenessfor each variable on a scale from 1to 4. The specific variabledefinitionsand the definitionsof the 1-4 designationsare as follows: 18 (a) NonfinancialFirms OwningBanks:the ability of nonfinancialfirms to own and control banks. (1) Unrestricted- A nonfinancialfirm may own 100percent of the equity in a bank. (2) Permitted- Unrestrictedwith prior authorizationor approval. (3) Restricted- Limits are placed on ownership,such as a maximumpercentageof a bank's capital or shares. (4) Prohibited- No equity investmentin a bank. (b) Banks OwningNonfinancialFirms:the abilityof banks to own and control nonfinancialfirms. (1) Unrestricted- A bank may own 100 percent of the equity in any nonfinancial firm. (2) Permitted- A bank may own 100percent of the equity in a nonfinancialfirm, but ownershipis limited based on a bank's equitycapital. '1 It should be noted that this particular quantificationrequiredjudgement on the part of the authors taking into accountinformationin the two surveys as well as informationobtainedfrom follow-up questionsand the Institute of InternationalBankers. "Ibid. 14 (3) Restricted- A bank can only acquire less than 100percent of the equity in a nonfinancialfirm. (4) Prohibited- A bank may not acquire any equity investmentin a nonfinancial firm. These particularregulationsare quite importantand, needless to say, controversial. As Figure I shows,many countries freely allow for the cross-ownershipof shares between banks and commercialfirms. The regulationregardingthe extent to which a bank may own shares in a nonfinancialfirm clearlyaffects the abilityof a bank to diversifyits revenue stream and is thereforesimilar in some ways to the regulatoryrestrictions on its activities as describedabove. For this reason, we also combinethis particularregulationwith the three activity regulationsto create an overall restrictivenessvariable,which ranges in value from I to 4, and its variation across countriesis shown in Figure 6, as mentionedearlier.The higher values, as in the case discussedearlier,indicate greater restrictiveness. 3. CompetitionRegulatory Variables. There are three variables that qualitativelycapture the extent to which competitionwithinthe banking industryis restricted. The variables all relate to the ability of existing or new banks to enter the bankingbusiness. More specifically,the three variablesare defined and quantifiedas follows: 19 (a) Limitations on Foreign Ownership of Domestic Banks: whether there are any limitationsplaced on the ownershipof domesticbanks by foreign banks. If there are any restrictions,this variable is assigned a value of 1 and a value of 0 otherwise. (b) Limitationson Foreign Bank Entry:whetherthere are any limitationsplaced on the ability of foreignbanks to enter the domesticbanking industry. If there are any restrictions,this variableis assigned a value of 1 and a value of 0 otherwise. (c) Entry into BankingRequirements:whetherthere are specific legal submissions required to obtain a license to operate as a bank. We considereddifferent types of submissionsthat could potentiallybe consideredby the banking authoritieswhen decidingupon whetheror not to grant a license. These are as follows: (1) Draft by-laws. Of 106 countries, 100 say yes and 6 say no. (2) Intendedorganizationalchart. Of 107 countries, 102 say yes and 5 say no. (3) First 3-year financialprojections.Of 107 countries, 102 say yes and 5 say nc. 9 The first two variables are obtained from the OCC survey. 15 (4) Financial informationon main potential shareholders.Of 107 countries, 101 say yes and 6 say no. (5) Background/experienceof futuredirectors.Of 107countries, 106 say yes and I saysno. (6) Background/experienceof future managers.Of 106countries, 97 say yes and 9 say no. (7) Sourcesof fundsto be used to capitalizethe new bank. Of 105 countries,91 say yes and 14 say no. (8) Intendeddifferentiationof new bank from other banks. Of 105 countries, 84 say yes and 21 say no. Each of these types of submissionswas assigned a value of 1 if it was required and a value of 0 otherwise. This means that the more informationrequiredby the regulatory authoritiesof the type indicatedwhen decidingupon whetheror not to issue a license, the more restrictivewill be entry into banking. The Entry into Banking Requirements variableis createdby addingthese eight variablestogether. It therefore may range in value from 0 to 8, with higher valuesindicatingmore restrictiveness. The higher the score presumablythe more entry into bankingwould be restrictedbecause there are more groundsfor rejecting a license request.The higherthe score, moreover,presumablythe greater the quality of the new entrants and thereforethe less likely a banking crisis and the biggerthe overall enhancementin bank performance. More generally,the variablesrelatingto regulationsregardingthe ability of foreignbanks to enter the bankingbusinesswithin a country are quite importantfor capturing the competitive environment. Foreign bank entry through branches may have different effects on a banking industry,the overall financial system,or even bank fragilitythan entry through the acquisitionof domesticbanks. It may therefore be worthwhileto considereach of these variables separatelyin any empirical work. 4. CapitalRegulatory Variables. It is widely agreed that regulatory requirementson the magnitudeof capital and its relationshipto total assets may be importantin understanding bank performanceand bank fragilityas well as the overall developmentof the banking industry. These are, of course, different ways of measuringthe importanceof capital requirementson various financial and economicoutcomesdeemed to be important. We have compiled alternativequantitativemeasuresof capital regulatory stringencybased upon the survey informationto indicatethe way in which our database may be used. Specifically, 16 there are four different capital regulatoryvariablesthat capture differentbut complementary measuresof the stringencyof regulatorycapital requirementsacrosscountries. The specific measures are as follows: (a) OverallCapital Stringency:whetherthere are explicit regulatoryrequirements regarding the amount of capital that a bank must have relative to various guidelines. We consider several guidelinesto determinethe degreeto which the leveragepotential for capital is limited. These are as follows: (1) Does the minimumrequired capital-to-assetratio conformto the Basle guidelines?Of 107 countries, 100 say yes and 7 say no. (2) Does the minimumratio vary with market risk? Of 105 countries,24 say yes and 81 say no. (3) Is the market value of loan losses deductedfrom reported accountingcapital? Of 104countries, 57 say yes and 47 say no. (4) Are unrealized losses in the securitiesportfoliodeducted from reported accountingcapital? Of 104countries, 60 say yes and 44 say no. (5) Are unrealizedforeignexchange losses deducted from reported accounting capital? Of 102 countries,62 say yes and 40 say no. We assign a value of 1 to each of the above questions if the answer is yes and a 0 otherwise. In addition, we assign a value of I if the fraction of revaluation gains that is allowedto count as regulatorycapital is less than 0.75. Otherwise,we assign a value of 0. By adding together these variableswe createthe variable Overall Capital Stringency. It ranges in value from 0 to 6, with higher values indicatinggreater stringency.Notice that this particularmeasure of capital stringencyis to some degree capturing whether or not regulatory capital is solelyan accountingconcept or at least partially a market-value concept. Figure 11 shows the variation amongcountries for this variable. (b) Initial Capital Stringency:whetherthe source of funds counted as regulatory capital can include assets otherthan cash or governmentsecuritiesand borrowedfunds as well as whetherthe sources are verified by the regulatoryor supervisoryauthorities. More specifically,the followingthree questions were asked: (1) Can initial and subsequent infusionsof regulatorycapital include assets other than cash or governmentsecurities?Of 102countries,45 say yes and 57 say no. (2) Can the initial infusion of capital be based on borrowed funds? Of 101 countries, 34 say yes and 67 say no. (3) Are the sources of fundsthat count as regulatory capital verified by the regulatory or supervisoryauthorities? Of 105 countries, 86 say yes and 19 say no. For those questions that are answered yes, we assign a value of 1. Otherwise, values of 0 are assigned. This means that when adding these three variables together our newly 17 createdvariable may range from a low of 0 to a high of 3, with a highervalue indicating less stringency. (c) CapitalRegulatory Index: is simplythe sum of the previous two measuresof capital stringency. It therefore may range in value from 0 to 9, with a higher value indicatinggreater stringency.Figure 12 showsthe variationamong countries for this variable. (d) MaximumCapitalPercentage by Single Owner:the maximumallowable percentageownershipof a bank's capital by a single owner. This variable may reach 100 percent if there is no maximumset by the regulatory/supervisoryauthorities.Many countrieshave limits, perhaps reflecting concernsabout a dominant owner gainingtoo much control at the expenseof minority interests. 5. OfficialSupervisoryAction Variable. The four types of variables discussed so far are regulatoryvariables. These variables basicallyimplementvarious laws that define a bank in terms of what it takes to enter banking,who may own a bank, how much is required and what counts as regulatory capital, and what encompassesthe businessesof banking. Once a bank is operatingwithin the regulatory environment,it is subjectto monitoring and control through and by various official supervisoryactions. We now describethe various variables that we have constructed from the survey responsesto capture quantitativelythe degree to which supervisoryauthorities may interveneto promotea "safe and sound" banking industry. (a) Official SupervisoryPower:whetherthe supervisoryauthoritieshave the authority to take specific actions to prevent and correctproblems. This variable is based upon yes or no responsesto the following16 questions: (1) Can supervisorsmeet with any externalauditorsto discusstheir reports without bank approval? Of 107 countries,78 say yes and 29 say no. (2) Are auditors legallyrequiredto report any misconductby managers or directors to the supervisoryauthorities?Of 107 countries,65 say yes and 42 say no. (3) Can the supervisoryauthoritiestake legal action against externalauditors for negligence? Of 107 countries,55 say yes and 52 say no. (4) Can the supervisoryauthoritiesforce a bank to change its internal organizational structure? Of 107countries, 78 say yes and 29 say no. 18 (5) Can the depositinsuranceagency take legal action against bank directors or officers? Of 59 countries,20 say yes 39 say no.20 (6) Are off-balancesheet items disclosedto the supervisoryauthorities?Of 106 countries, 104 say yes and 2 say no. (7) Does failure to abide by a cease-desisttype order lead to the automatic impositionof civil and penal sanctionson the directorsand managers of a bank? Of 102 countries,63 say yes and 39 say no. (8) Can the supervisoryauthoritiesorder a bank's directors/managersto provide provisionsto cover actual or potential losses?Of 102 countries,88 say yes and 14 say no. (9) Can the supervisoryauthoritiessuspendthe directors' decision to distribute dividends? Of 106 countries,84 say yes and 22 say no. (10) Can the supervisoryauthoritiessuspendthe directors' decision to distribute bonuses? Of 103 countries,62 say yes and 41 say no. (11) Can the supervisoryauthoritiessuspendthe directors' decisionto distribute managementfees? Of 103 countries,54 say yes and 49 say no. (12) Can the supervisoryauthoritiessupercedeshareholderrights and declare a bank insolvent? Of 101countries, 74 say yes and 27 say no. (13) Can the supervisoryauthoritiessuspend some or all ownershiprights of a problem bank? Of 103 countries,85 say yes and 18 say no. (14) Regardingbank restructuringand reorganization,can the supervisoryauthorities supercede shareholderrights? Of 102 countries,81 say yes and 21 say no. (15) Regardingbank restructuringand reorganization,can the supervisoryauthorities remove and replace management? Of 105 countries,94 say yes and 11 say no. (16) Regarding bank restructuringand reorganization,can the supervisoryauthorities remove and replacedirectors? Of 105countries,91 say yes and 14 say no. The answersto these 16 questions collectivelyconstituteour measure of Official SupervisoryPower. We specificallyassign a value of 1 to a "yes" answer and a value of 0 to a "no" answer. This variable is the sum of these assigned values and therefore may range from 0 to 16, with a higher value indicatingmore power. Figure 13 shows the variation amongcountries for this variable.We also decomposethis variable into three constituentparts. The resultingthree variables are as follows: [1] Prompt CorrectiveAction:whether a law establishespre-determined levels of bank solvencydeteriorationwhich forces automatic enforcement actions such as intervention.2 ' If this is indeedthe case, we assign a value of 1; 0 otherwise. We then multiplythis by (4), (7), (8), (9), (10) and (11) as describedimmediatelyabove. The Prompt CorrectiveAction variable may therefore range from 0 to 6, with a higher value indicatingmore Cambodiaanswered no to this question,while reporting havingno explicit deposit insurance scheme. The specific survey question asks: "Does the Law establish pre-determinedlevels of solvency deteriorationwhich forces automatic actions (like intervention)?"This questionis also used below in the SupervisoryForbearance Discretion variable,which some may view as a "negative"Prompt CorrectiveAction variable.It should also be noted that the labeling of the latter variable may be somewhat misleadingbecause some of the variables employed in its construction are based upon the authorityto engage in an action rather than the action being mandatory. 20 21 19 promptness in respondingto problems.Figure 14 shows the variation among countries for this variable. [2] RestructuringPower:whetherthe supervisoryauthoritieshave the power to restructureand reorganize a troubled bank. This variable is simplythe sum of(14), (15) and (16) as describedabove. It may range in value from a low of 0 to a high of 3, with a higher value indicatingmore power. Figure 15 shows the variationamongcountries for this variable. [3] Declaring InsolvencyPower: whetherthe supervisoryauthoritieshave the power to declarea deeply troubledbank insolvent. This variable is simplythe sum of (12) and (13) as describedabove. It may range in value from 0 to 2, with a higher value indicatinggreater power. Figure 16 shows the variationamong countriesfor this variable. (b) SupervisoryForbearanceDiscretion:Even when authorized,supervisory authoritiesmay engage in forbearancewhen confrontedwith violations of laws or regulations or with other imprudentbehavior on the part of banks. To capture the degree to with this type of discretion is allowed,we constructeda variablebased on the followingquestions: (1) Regardingbank restructuringand reorganization,can the supervisoryauthorities or any other governmentagency forbearcertain prudentialregulations?Of 101 countries,84 say yes and 17 say no. (2) Are there pre-determinedlevels of solvencydeteriorationthat force automatic actions, such as intervention?Of 104 countries,49 say yes and 55 say no. (3) Must infractionsof any prudentialregulationsbe reported? Of 104countries, 103 say yes and 1 says no. (4) With respectto (3), are there any mandatoryactions to be taken in these cases? Of 103 countries,81 say yes and 22 say no. We assign a value of 1 when the answer is no and a value of 0 otherwise,except for (1) in which case the reverse is done for purposesof the variable being constructedhere. This variable is calculatedas the sum of these assignedvalues. It may therefore range in value from 0 to 4, with a highervalue indicatingmore discretion.Figure 17 shows the variation among countries for this variable. (c) Loan ClassificationStringency. This variablemeasuresthe degree to which loans that are in arrears must be classified as sub-standard,doubtful,or loss. More specifically, we were provided with the actualnumber or a rangeof days beyond which a loan would be put into one of these three classifications. We simplysummedthe minimumnumbers provided across the three classificationsso that highervalues of this variable indicate less stringency. (d) ProvisioningStringency. This variablemeasuresthe degree to which a bank must provision as a loan is classifiedfirst as sub-standard,then as doubtful,and lastly as loss. We have been providedwith the minimumpercentageof the loan for which provisioning must be provided as a loan progressesthrough each of the three problem loan classifications. We therefore sum the minimumrequired provisioningpercentages when 20 a loan is successivelyclassified as sub-standard,doubtful,and loss. This sum is then the value of our variable ProvisioningStringency,with higher values indicatingmore stringency. (e) Liquidity/ DiversificationIndex. It was decided to include a variable capturing the degree to which banks are encouragedor restrictedwith respect to liquidityas well as asset and geographicaldiversification. In particular,our variable or index was based on the followingthree questions: (1) Are there explicit, verifiable,and quantifiableguidelines for asset diversification?Of 107countries,38 say yes and 69 say no. (2) Are banks prohibitedfrom making loans abroad?Of 106 countries, 15 say yes and 91 sayno. (3) Is there a minimum liquidityrequirement?Of 103countries, 77 say yes and 26 say no. On the basis of "yes or no" answersto these questions,we calculateda Liquidity/ DiversificationIndex. A value of 1 was assignedto yes, except in the case of question (2) where a 1 was assignedto no sincethis responseis associatedwith greater diversification.These three values are summedand may range in value from 0 to 3, with a higher value indicatinggreater liquidityand diversification. 6. OfficialSupervisoryResource Variables. It is, of course, importantto know the official actions that the supervisoryauthoritiesare requiredor may take in response to various banking situations. But it is also importantto know the officialsupervisoryresources available to take these actions. More specially,we attemptto measurethe "quantity and quality" of bank supervision. This is done on the basis of 5 variables. We also recognize that it is importantto know the degreeto which the supervisoryauthoritiesare independentand therefore include a variableto capture such independence.All these variables are as follows: (a) Supervisorsper Bank: This variableis the numberof professionalbank supervisors per bank. Figure 7 shows the variationamongcountries, as mentionedearlier. (b) Bank SupervisorYears per Bank: This variable is the total numberof years for all professionalbank supervisorsper bank. (c) SupervisorTenure: This variableis the average years of tenure of professionalbank 2 2 Figure 18 showsthe variation among countries for this variable. supervisors. 22 An attemptwas made to obtain data on the ratio of bank supervisorysalaries (at entry, on average, with 10 years experience,and the maximum)relativeto estimatesof private bankers'compensation,but the latter were either most unavailableor difficultto obtain with any degree of confidence.Thus the "turnover"variable is the best approximation--butstill a slippery one -- to the incentivesthat supervisors face, in additionto informationon supervisoryindependenceand promptcorrective action requirements. 21 (d) Onsite ExaminationFrequency:This variableis the frequencyof onsite examinationsconducted in large and medium size banks, with 1 denoting yearly, 2 denotingevery 2 years, and so on. (e) LikelihoodSupervisorMoves into Banking: This variable is the fraction of supervisorsemployedby the bankingindustry subsequentto retirement, with 0 denoting never, 1 denoting rarely, 2 denotingoccasionally,and 3 denoting frequently. Figure 19 shows the variationamong countriesfor this variable. (f) Independenceof SupervisoryAuthority:This variablemeasuresthe degree to which the supervisoryauthorityis independent.It is based upon the followingthree questions: (1) How is the head of the supervisoryagency (and other directors)appointed? (2) To whom are the supervisorybodies responsibleor accountable? (3) How is the head of the supervisoryagency (and other directors)removed? Dependingupon the answersto these questions,especiallythe last, the degree of independenceis rated as 1 for low independence,2 for medium independence,and 3 for 23 high independence. 7. Private Monitoring Variables. Bank behaviorclearly is circumscribedby various regulations and supervisoryactions as indicatedabove. But it is also affected by private market forces. It is therefore importantto try to capture to some degree the extent to which market or private "supervision"exists in differentcountries.To this end, we constructed and quantifiedfive different measures of this type of variableusing informationfrom the survey and based essentiallyon informationthat is disclosedand thus available to the public. These measuresare as follows: (a) CertifiedAudit Required:This variablecaptureswhether an externalaudit is requiredof the financialstatementsof a bank and, if so, by a licensed or certified auditor. Such an audit would presumablyindicatethe presenceor absence of an independent assessmentof the accuracy of financialinformationreleased to the public. If both factors exist a 1 is assigned;0 otherwise. (b) Percent of 10 Biggest BanksRated by InternationalRatingAgencies: The percentageof the top 10 banksthat are rated by internationalcredit rating agencies. The greater the percentage,the morethe public may be aware of the overall condition of the bankingindustry as viewed by an independentthird party. (c) AccountingDisclosure and Director Liability:Whether the income statement includes accrued or unpaid interest or principalon nonperformingloans and whether banks are required to produceconsolidatedfinancial statements,includingnonbank 23For example, Canada was assigned a 3 because the head or "The superintendentcan only be removed for cause. If removed, a report disclosingsuch reasons must be tabled in parliament."Some also respondedflatly that "The Governor cannot be dismissed during his original or renewedperiod of appointment"or can only be removedfor specified cause and with parliamentary approval. 22 financial affiliatesor subsidiaries. The release of this type of informationor its absence affects the ability of private agentsto monitorand hence influencebank behavior.Also, whether bank directors'are legally liable if informationdisclosed is erroneous or misleading.If all three factorsexist a I is assigned;0 otherwise. (d) No Explicit DepositInsurance Scheme: This variabletakes a value of I if there is no explicit depositinsurance schemeand if depositorswere not wholly compensatedthe last time a bank failed, and 0 otherwise.A highervalue would indicate more private monitoring. (e) Private MonitoringIndex: the sum of (a), (b) [which equals I if the percentage is 100; 0 otherwise],(c), and (d). In addition, three other measures are included in the index based on 'yes or no' answers. Specifically,a I is assigned if off-balance sheet items are disclosedto the public; a I if banks must discloserisk managementproceduresto the public; and a 1 if subordinateddebt is allowable(required)as a part of regulatory capital. This variabletherefore ranges from 0 to 7, with higher values indicatingmore private oversight.Figure 20 shows the variationamongcountries for this variable. 8. Deposit Insurance Scheme Variables. Regulationsand supervisorypractices clearly are importantparts of a bankingsystem . But they do not operate in a vacuum. Instead, their effect on various economicoutcomesmay depend importantlyon the existence(or lack thereof) and featuresof a country's deposit insurancescheme. We therefore constructor rely on five different quantitativevariablesto capture the type of the deposit insurance regime a country has chosen to adopt.These are as follows: (a) DepositInsurer Power:This variable is based on the assignmentof 1 (yes) or 0 (no) values to three questions assessingwhetherthe deposit insuranceauthority has the authorityto make the decisionto intervenein a bank, to take legal action against bank directorsor officials, or has ever taken any legal action against bank directors or officers. The sum of the assigned values ranges from 0 to 3, with higher values indicatingmore power. (b) Extra Deposit InsuranceCoverage:captureswhetherany deposits not covered at the time of a bank failure were nonethelesscompensated.If so, it takes on a value of 1. and is 0 otherwise. Of 45 countries, 16 say yes and 29 say no. (c) Deposit InsurancePayout Delay: the averagetime in months that it takes to pay depositors of a failed bank in full (the latter being defined by the amount covered in relevant statutes). (d) Deposit InsuranceFunds-to-TotalBank Assets:the size of the deposit insurance fund relative to total bank assets. In the case of the U.S. savingsand loan debacle during the 1980s, the insuranceagency itself reportedinsolvency.This severely limited its ability to effectivelyresolve failed savingsand loan institutions in a timely manner. In weak institutionalenvironments,inadequatefunds couldactually increase inappropriate behavior of banks. 23 (e) MoralHazard Index: based on DemirgUic-Kunt and Detragiache(2000),who used principal componentsto capture the presence and design features of explicit deposit insurancesystems,with the latter including no coinsurance,foreign currencydeposits covered, interbank deposits covered,type of funding,source of funding,management, membership,and the level of explicit coverage.The higherthe value, the greater is moral hazard. 9. Market StructureIndicators The structure of the banking industrynecessarilyinteractswith regulations,supervisorypractices and design featuresof a depositinsurancescheme to producevarious economic outcomes.We note the followingindicators of market structureavailable in the survey: (a) Bank Concentration:the fraction of deposits held by the five largestbanks. Figure 3 shows the variationamong countriesfor this variable,as mentionedearlier. (b) Foreign Bank Ownership:the fraction of the bankingsystem's assets that are 50% or more foreignowned. Figure 5 shows the variationamongcountries for this variable,as mentionedearlier. (c) Government-OwnedBanks:the fraction of the bankingsystem's assets that are 50% or more governmentowned.Figure 4 shows the variation amongcountries for this variable, as mentionedearlier. (d) Number of New Banks:number of applicationsapproved. (1) New DomesticBanks: numberof applicationsapproved. (2) New Foreign Banks:numberof applicationsapproved. (e) No Entry Applications:whetherany applicationsfor bankinglicenses, with a positive numberassigned a 1; 0 otherwise. (1) No DomesticApplications:whether any applicationsfor domestic banking licenses,with a positive numberassigned a 1; 0 otherwise. (2) No ForeignApplications:whetherany applicationsfor banking licenses,by foreign entities,with a positive numberassigned a 1; 0 otherwise. (f) Fractionof Entry ApplicationsDenied: fraction of applicationsdenied. (1) Foreign Denials:fraction of foreign applicationsdenied. (2) DomesticDenials: fraction of domestic applicationsdenied. Figures 21, 22, and 23 shows the variationamongcountries for these latter three variables. We conclude by re-emphasizingthat these particulargroupingsand aggregations(as well as quantification)are not unique,and they refer not only to our judgement but to the rules more 2 4 The Private Monitoring Index, for example, may not comport with than the implementation. 24 Our databasecontains informnation on the extent to which authoritiesactually enforce given regulations or use the powers with which they were endowed. 24 everyone's priors regardingindividualcountry rankings. In this regard it must be remembered that the value assignedto the U.S. as comparedto other countriesreflects the responsesof countries,and not necessarily reality as perceivedby those studying it. In any event, as we have noted,there is, of course, an importantdifferencebetweenregulations and practices. We attempt to account for divergencesbetweenwhat the regulationssay and what the authoritiesdo. For example,we have informationas to whetherthe supervisoryauthoritiesor any other governmentagency can forbearprudentialregulationsregarding bank restructuringand reorganization---of 101 countries,84 say yes and 17 say no. As another example,we also know whether infractions of any prudentialregulationfound by a supervisormust be reported. Furthermore,we know whetherthere are any mandatory actionsin such cases, and if so, who, if anyone,is authorizedto grant exceptions.Lastly, we know in some cases how many, if any, exceptionswere actually granted and who authorizedthem. This informationis presented in Table 4. It shows that most countriesrequire that infractionsbe reported and have mandatory actions in such cases. The table shows,more generally,that there are indeed instances in which rules and regulationsmay not tell the whole story aboutwhat goes on in a country.It is for this reason that some of the variables included in our databasemay help to assess the "credibility"of stated or formal regulationsand supervisorypractices. A final point is that while it would be importantto have informationfor the variables in our database for a lengthyperiod of time, the data simplydo not exist for the countriesthat responded to our surveys,and we have found it impossibleto backdateour informationfor all the variables. In no small part, this is because of changesof the governmentsin countries, changeseven in the borders and number of countries,and a fundamentalre-orientationof bank regulationand supervisionsince the 1980s. In any event, in an earlier study Barth, Caprio ard Levine (2000) found evidencethat the specific regulatorypowers accordedto banks for many 25 countriesappeared to change relatively little from the 1970suntil quite recently. This is probably also true of supervisorypractices, for which it may take a long time to effect meaningfulchange. Efforts will be made, however,to obtain more informationon the regulation and supervisionof banks over time for countries. IV. Characterizing the Data A. Differences Among Countries by Income Level and Development Status Table 5 presents informationon our variableswhen the countries are grouped by income level and developmentstatus.21Some of the more interestingdifferencesamong countrieswhen grouped in this way are as follows: * There is a clear trend for the restrictiveness of bank activities to decline as one moves from the lower income countries to the higher income countries. It is generallythe case, however, that real estate activities are more restrictedthan securities or insurance activities in countriesregardlessof income level. * Countriesat all income levels on averageplace fewer restrictionson non-financial firms owning banks than vice versa. More generally,the least restrictedactivity or cross-ownershiparrangementis the ownershipof banks by non-financialfirms among lower income countries. * Developingcountriesplace more limitationson foreignbank ownershipof domestic banks and foreign bank entrythrough branchingthan developed countries. * The maximumpercentageownershipof a bank's capital is higher among higher income countriesthan lower income countries. * The stringencyof capital requirementsis lower for lower income countriesthan for upper income countries. This is the case for all the three measuresof capital regulatorystringency. * The overall power of the official supervisoryauthoritiesto take action is generallythe same in countriesacross all four income levels.The Prompt CorrectiveAction variable,however, is lower for higher income countriesthan lower income countries and for developed countriesas compared to developingcountries or emerging market economies. * The stringencyof loan classificationis lower for lower income countries than higher income countries,but the reverse holds with respect to the stringency of provisioning.2 6 See appendix 3 for the list of countries by geographicalregion, income level and development status. Althoughprovisioningmay be understandablylower in richer countries to the extent that the collection rate is superior,there was substantialunder-reportingfor this variable among higher income countries comparedto all the 25 26 26 * The independenceof the supervisoryauthority is lower in developing countriesthan in developedcountries. * The numberof supervisorsper bank is more than three times greater in developing countriesthan in developedcountries. * The degree of private monitoring increasesas one moves from lower income countries to high income countries. * Both bank concentrationand foreignbank ownership are essentiallyinvariantto which of the four income categoriescountries are placed. * Governmentownershipof banks increases in countries on average as one moves from the high income level to the lower income level. * The fraction of entryapplicationsdenied, includingboth domestic and foreign,are quite different in countries across the four income level categories,with the highest rejection rates being in lower income countries. * Lastly,as comparedto other groupings,banks in offshorecenters display the highest degree of foreign ownership,highest fraction of domestic entry applicationsdenied, and least degree of supervisoryauthority independence. B. DifferencesAmong Countriesby GeographicalRegion Table 6 shows the difference in the averagesfor our variables in countrieswhen they are grouped by geographicalregion. While clearly there are differencesacross regions, some of the more strikingand uniform differencesare for the European Union (EU) countries and the South Asian countries.First, the EU countries are uniformlythe less restrictivewhen it comes to securities, insuranceand real estate activities,bank ownershipof nonfinancial firms, and nonfinancialfirm ownershipof banks. Second,the EU countriesplace no limitations on foreign bank entry in contrastto other regional groupings.Third,the EU countries displaythe greatest stringencyas regards capital regulation.Fourth, the EU countries have the fewest supervisorsper bank. Fifth, the EU countriesdisplaythe greatest degree of independencewith respectto the supervisoryauthority. Sixth, both foreign-bankownershipand government-bankownership are the lowest in the EU countries as comparedto the other groupings. other income categories. Also, Cavallo and Majnoni(2000) showthat whereasindustrial countries build up provisions in good times and draw them down as the businesscycle weakens,there was no such variation in the developingcountries in their sample. 27 South Asian countries,in contrastto the EU countries,are the most restrictivewith respect to the ownership of banks by nonfinancialfirms. These countriesalso place the most limitationson foreignbank entry, with the East Asian and Pacific countries a close second. The South Asian countrieshave the highest numberof supervisorsper bank, again with the East Asian and Pacific countries not far behind. In addition, the SouthAsian countrieshave the lowest value for the Private MonitoringIndex and the highest value for the Moral Hazard Index. Lastly, these countries have nearly the lowest percentageof foreignbank ownership,while simultaneouslyhavingthe highest percentageof government-bankownership. C. Correlationsin Variablesfrom Our Database To create a better understandingof the data, we calculatedthe pairwisePearson correlationcoefficientsfor all the variables in Table 3. We also assessedtheir significancelevels and found that most of the correlationcoefficientswere not significantlydifferent from zero. Here, we focus on those variablesthat are generally either significantor amongthe more importantvariables in terms of inter-relationships.Tables 7a through 7d present these variables and the associated correlations. We conductthese correlationsonly for countrieswith a population greater than 100,000. Table 7a shows the correlationsamongthe three bank activity restrictivenessvariables and the two mixing of bankingand commercevariables.The three restrictivenessvariables are all positivelyand significantlycorrelatedwith one another. Two of these variables, moreover,are positively and significantlycorrelatedwith the two cross-ownershipvariables. Only insurance activities are not significantlycorrelatedwith the ownershipvariables.The two ownership variables themselves, however, are not significantlycorrelatedwith each other. Given the positive and significantcorrelationsamongthe bank restrictivenessvariables (i.e., banks 28 engaging in securities, insurance,and real estate activitiesand banks owing nonfinancialfirms), it makes senseto combine them as discussedearlier into an overall bank restrictivenessvariable. Table 7b shows the correlationsamong some of our regulatory,supervisoryand deposit insurancevariables. It may be seen that 17 of the 20 correlationsare not significant.The bank activity restrictivenessvariables and the bank ownershiprestrictivenessvariables are generally not significantlycorrelated with the Moral HazardIndex, PrivateMonitoringIndex, Official SupervisoryPower, or Prompt CorrectiveAction.The three exceptionsare securities and insuranceactivities. Both of these variables are negativelyand significantlycorrelatedwith the Private MonitoringIndex. Securitiesactivities, in addition,are positivelyand significantly correlatedwith Prompt CorrectionAction. Table 7c presents the pairwisecorrelationsamong four of the variables discussed in the immediatelypreceding paragraph:Moral Hazard Index, Private MonitoringIndex, Official SupervisoryPower,and Prompt CorrectiveAction. It is not surprisingthat Official Supervisory Power and Prompt CorrectiveAction are positively and significantlycorrelated insofar as the latter variable is a componentof the former. What is interestingis that the Private Monitoring Index is significantlycorrelatedwith two of the other variablesand nearly so with the remaining third variable. It is negativelyand significantlycorrelatedwith the Moral Hazard Index and positively and significantlycorrelatedwith Official SupervisoryPower. It is positive and nearly significantlycorrelatedwith Prompt CorrectiveAction.These lattertwo findingsmay be interpretedas meaning that supervisorypractices are to some extent embodied withinthe private monitoringvariable. Table 7d contains informationon the correlationsfor 23 other pairs of variables. Perhaps not surprisingly,the three supervisoryresourcevariables are all positively and significantly correlated. Perhaps surprisingly,on the other hand, they are not correlated with Onsite Frequency 29 of Examinations.The two bank entry variables are also positively and significantlycorrelated. The GovernmentOwned Bank variableprovides some interestingresults. It is positively and significantlycorrelatedwith both Limits on ForeignBank Entry and Fraction of Entry ApplicationsDenied. Furthermore,it is negativelyand significantlycorrelatedwith Foreign Bank Ownershipand the Private MonitoringIndex. Still other results indicatethat SupervisoryForbearanceDiscretion,perhaps reassuringly, is negatively and significantlycorrelatedwith the Private MonitoringIndex, Declaring InsolvencyPower,Loan ClassificationStringency,and Prompt CorrectiveAction.The Private MonitoringIndex is positivelyand significantlycorrelatedwith Loan ClassificationStringency and the Capital Regulatory Index. Prompt CorrectiveAction is positively and significantly correlated with both Loan Classificationand ProvisioningStringency.Lastly, the Moral Hazard Index, somewhatsurprisingly,is not significantlycorrelatedwith either Deposit Insurance AuthorityPower or Deposit InsuranceFunds-to-TotalBank Assets. V. Summary and Conclusions As authoritiesaround the world attemptto decide how best to reform bank regulationand supervision,an importantinput should be a thorough understandingof what other countries do and eventuallyof the implicationsof these choices. This paper representsa key step towards the first goal. In a companionpaper, we study the relationshipbetweenbank performance and stabilitywith differences in bank regulationsand supervision[Barth,Caprio, and Levine, 20011. The main conclusionswe draw from this preliminaryresearchon performance and stability are as follows. First, regulatory and supervisorystrategiesthat promote private sector forces work. Countrieswith policies that promoteprivate monitoringof banks have better bank performance and more stability. Furthermore,countrieswith more generous deposit insuranceschemestend 30 to have poorer bank performance and greater bank fragility,which confirmsresearch by Cull, Senbet, and Sorge (2000) and Demirgtiu-Kuntand Detragiache(2000).The private sector theme is reinforcedby our results on governmentbanks. Governmentownershipis negatively linked with both bank performance and stability. Second, diversificationof income streamsand loan portfoliosalso works toward improvingperformance and stability. We find that diversifyingincome streams- by not restrictingbank activities - is positively linkedwith bank performanceand stability. Diversifyingincome streams, not surprisingly,works best when there is an active securities market in which to diversify. Furthermore,countriesin which banks can - and are encouragedto - diversifytheir portfoliosdomesticallyand intemationallysuffer fewer crises. The old adage, "don't put all your eggs in one basket," still seems relevant for bank regulation in the 215 century. 31 REFERENCES Barth, James R., Gerard CaprioJr., and Ross Levine, 2000. "Banking Systems Aroundthe Globe: Do Regulationand OwnershipAffect Performanceand Stability?"in Frederic S. Mishkin, editor, Prudential Supervision:What Works and What Doesn't, Universityof Chicago Press, 2001. , 2001. "Bank Regulationand Supervision:What Matters Most," WorldBank PolicyResearch WorkingPaper, forthcoming. Cavallo, Michele and GiovanniMajnoni,2000. "Do Banks Provisionfor Bad Loans in Good Times: Evidence from G10 and non-G10Countries,"The World Bank, mimeo. Cull, Robert, Lemma Senbet,and Marco Sorge,2000, "Deposit Insuranceand Financial Development,"World Bank, mimeo. Demirgiiu-Kunt,Asli, and Enrica Detragiache,2000. "Does Deposit InsuranceIncreaseBanking System Stability?An EmpiricalInvestigation,"mimeo, The World Bank, http://www.worldbank.org/research/interest/confs/upcoming/deposit insurance/home.ht m Demirgulc-Kunt,Asli, and Tolga Sobaci,"Deposit InsuranceAroundthe World: A Data Base," The World Bank, http://www.worldbank.org/research/interest/confs/upcoming/deposit 32 insurance/data.htm. Table I AdmilnistrativeStructureof BankSupervisionAround the World What body/agencysupervisesbanks? Is theremorethan one supervisorybody? To whomare supervisorybodies responsibleor accountable? Central Bank of Argentinavia the Superintendencyof Financialand ForeignExchange Institutions CentralBankof Aruba AustralianPrudentialRegulationAuthority;all banks are also subject to the CorporationsLaw administeredand enforced by the AustralianSecuritiesand InvestmentsCommission (ASIC) Ministryof Finance Bahrain MonetaryAgency BangladeshBank NationalBankof Belarus Banking& FinanceCommission yes Central Bank no yes CBA is independent CommonwealthParliament no no no yes no RoyalMonetaryAuthorityof Bhutan no Bolivia Botswana Superintendencyof Banks FinancialInstitutionsDepartment,Bankof Botswana no no Brazil BritishVirginIslands, The Burundi Cambodia Canada Cayman Islands Chile China Croatia Cyprus Central Bankof Brazil BankingInspectorate,FinancialServicesDept. Central BankInspection Bank Supervisionof theNational Bankof Cambodia OSFI CaymanIslands MonetaryAuthority Superintendencyof Banks People'sBank of China CroatianNationalBank Bank SupervisionDept., Central Bankof Cyprus no no no no no no no Parliament Board of Directors Government President Ministerof Financeand Ministerof EconomicAffairs Central Bank Governor,Finance Sectretary,Finance Ministerand Board of Directors Finance Ministrr Minsterof Finance and Development Planning Ministry of Finance Minister of Finance Govemorof CB Govemorof NationalBank of Cambodia Ministerof Finance Govemor in Council Ministry of Finance StateCouncil Parliament Board of Directors,Ministry of Finance, and President Board of Directors,CNB Argentina Aruba Australia Austria Bahrain Bangladesh Belarus Belgium Bhutan Czech Republic ______________ Denmark Egypt El Salvador Estonia Finland France Gambia,The Germany Ghana Gibraltar Greece Guatemala Guemsey Guyana Honduras Hungary Iceland India Indonesia Ireland Israel Italy Jamaica _ |no no no BankingSupevisionof CNB; Committeefor Securities(for |securities activities) | Danish FinancialSupervisoryAuthority CentralBankof Egypt Superintendenceof the FinancialSystem BankingSupervisionDepartment FinancialSupervisionAuthority CommissionBancarre Central Bank yes Bundesaufsichtsamt,with the help of the Deutsche Bundesbankfor a wide rangeof supportivetasks BankingSupervisionDept.,Bank of Ghana Commissionerof Banking,FinancialServicesCommision yes Bank of Greece Superintendencyof Banks Guernsey-FinancialServicesCommission Bank of Guyana NationalCommissionof Banks StateBankingand CapitalMarketSupervision;CentralBank of Hungary FinancialSupervisoryAuthority Board for FinancialSupervision(BFS) Bank of Indonesia(startingfrom 2002, supervisoryfunction will be transferredto a new institution) Central Bank BankingSupervisionDept, Bankof Israel Bank of Italy Central Bank no no no no no no no no yes Ministryof Economics CentralBank is an autonomousauthority Presidentand Consress Parliament Parliament Parliament Departmentof State for Finance and EconomicAffairs Ministryof Finance no no no no no yes Govemor,Bank of (jhana Govemorof Gibraltarand the UK Government Parliament La Junta Monetaria Goverrment Ministerof Finance President Ministryof Finance no no no Ministerof Commerce ReserveBank of India Parliament no no no no Not reported Govemor administrativecourts Ministerof Finance Table I AdministrativeStructureof Bank SupervisionAround the World Japan Jordan Kenya Korea,Rep of. What body/agencysupervisesbanks? Is theremorethan one supervisorybody? To whom aresupervisorybodies responsibleor accountable? FSA is the solesupervisorof banks Central Bankof Jordan CentralBank of Kenya BankingSupervisoryAuthority(BSA)and Financial SupervisoryCommission; Ministryof Financeand economy no no no yes Cabinet,the Diet and the Public Parliament Treasury Government supervises specialized banks Kuwait Latvia Lebanon CentralBankof Kuwait Bankof Latvia;CreditInstitutionsSupervisionDepartment BankingControl Commission no yes no Ministry of Finance Not reported High BankingCouncil headedby the Lesotho Central Bankof Lesotho(Bank SupervisionDivision) no Liechtenstein Lituania FinancialServicesAuthority SupervisionDepartment,Bank of Lituania no no Governor/Boardof Directors,Central Bank Prime Minister Central BankBoard, which is accountable Luxembourg Commissionde Surveillancedu SecteurFinancier(CSSF) no Minister of Finance Macau Macedonia Monetaryand ForeignExchangeAuthorityof Macau SupervisionDepartment,NationalBankof the Republicof Macedonia ReserveBank of Malawi Central BankofMalaysia MaldivesMonetaryAuthority Central Bankof Malta Bank of Mauritius National Bankingand SecuritiesCommission BankingSupervisionand RelationDepartment BankAl-Maghrib CentralBank Inspectionand SupervisionDept., Nepal Rastra Bank(CB) no no Secretaryfor Economyand Finance Parliament no no no no no no no no no no Minister of Finance MinisterofFinance Board of Directorsof MMA Ministerof Finance Board of the Bank of Mauritius Ministryof Finance Council of Administrationof NBM Govemor of Bank Al-Maghrib Ministryof Finance CentralBank De NedelandscheBankNV ReserveBank of NewZealand Central Bank of Nigeria(BankingSupervisionDept.) Central Bankof Oman Superintendencyof Banks no no no no no nobody Treasurer Ministryof Finance Board of Govemorsof CB Superintendencyof Banksis not responsibleor accountableto any other Peru Philippines Poland Superintenderciade Barca y Seguros CentralBankof Philippines Commissionfor BankingSupervision no no yes; there aredifferent supervisorsfor other financial To none accordingto the Constitution generalpublic Accountableto the Public Portugal PuertoRico Qatar Romania Bancode Portugal Office of the Commissionof FinancialInstitutions QatarCentral Bank National Bankof Romania Governor of the Central Bank to the Parliament Malawi Malaysia Maldives Malta Mauritius Mexico Moldova Morocco Namibia Nepal Netherlands New Zealand Nigeria Oman Panama entity institutions Russia Rwanda Samoa(Westem) Saudi Arabia Seychelles Singapore Slovenia SolomonIslands no yes no no Depositors Departmentode Hacienda Ministryof Finance Board of Directors,NBR and the Parliament State Duma (Parliament) Central Bank of Russia Federation BanqueNacionaldu Rwanda FinancialInstitutionsDept, CentralBank of Samoa SaudiArabianMonetaryAuthority yes no no Central Bankof Seychelles no MonetaryAuthorityof Singapore Bankof Slovenia CentralBank no no no Ministerof Finance Govemor,CBS Board of Directorsappointed by theGovt. At an institutionallevel, to the Ministerof Finance Board of Directors;Govemorof the Central Bank Govemment Parliament Headof State 34 Table I AdministrativeStructureof BankSupervisionAroundthe World What body/agencysupervisesbanks? Is theremorethan one supervisorybody? To whomare supervisorybodies responsibleor accountable? Officeof Registrarof Banks/BankSupervisionDept. no CentralBank Govemor(operationally); Bankof Spain no All administrativedecisionsof the Banco de Espanacan be appealedbefore the Ministryof Finance(except regulations which are to be appealed beforethe Sri Lanka BankSupervisionDept.,Central Bankof Sri Lanka no MonetaryBoard comprisingof The Govemor of the CB, Secretary-Generalof the Treasury,and a Memberappointedby St. Kitts Eastem CaribbeanCentralBankfor domesticbanks, respectivegovts. Superviseoff-shorebanks Finansinspektionen FederalCommissionof Banks (CFB) Central Bank,Ministry of Finance,Central DepositInsurance no MonetaryCouncIJ no no yes Govemment Parliamentand the govemment prime minister no National Bankof Tajikistan yes no no yes Ministry of Finance Govemment Ministerof Finance Ministry of Finance Superintendentof Banking no Govemorand PermanentSecretaryof FinancialServicesAuthority Officeof the Comptrollerof Currency Dependingon the typeof Dependingwhetherthe bank is part of a holdingcompany or conductssecuritiesor insuranceactivitiesin an operatingsubsidiary,other supervisorssuch as FDICor SEC may havesome HerMajesty'sTreasury Departmentof Treasury South Africa Ministry of Finance (legally) Spain Courts) the President Sweden Switzerland Taiwan(China) Corporation Tajikistan BankSupervisionDepartmentof the NationalBankof Tajikistan Thailand Tonga Trinidad& Tobago Turkey Ministryof Financeand Bankof Thailand National ReserveBankof Tonga CentralBank CentralBank and Treasuryconductsupervisoryoperations. The Banks' Regulatoryand SupervisoryAgencywhich will begin operation from Sept 2000 Turks and CaicosIslands Finance UnitedKingdom UnitedStates supervisory authority Vanuatu Venezuela Vietnam ReserveBank of Vanuatu-DomesticBanks;Financial ServicesCommission Superintendentof Banksand other FinancialInstitutions StateBank Inspectorate yes Parliament no no Ministry of Finance Govemorof the Central Bank (State Bank Bankof Zambia no Ministry of Finance of Vietnam) Zambia 35 Table 2 Some BasicDifferencesin BankingSystemsAroundthe World Percentof deposits Percentof total Percentof total Overallbank activities Professional Are supervisors Explicit deposit Percentof 10 Numberof Total bank insurance biggestbanks rated supervisors legally liable for and ownership bank assets bank assets accountedfor by 5 banks per assets/ GDP by int'l agencies scheme their actions? per bank restrictiveness governmentowned foreignowned largestbanks (percent) 100,000People 100 Yes Yes 2.4 1.8 49 30 48 0.3 54 Argentina 30 No Yes 1.0 1.0 77 0 94 8.7 Aruba 100 No No 2.0 2.0 17 6 73 0.3 Australia 80 Yes Yes 1.0 1.3 5 4 38 11.9 Austria 0 Yes No 1.5 2.3 28 4 71 3.0 186 Bahrain 0 Yes No 8.0 3.0 6 70 65 0.0 Bangladesh 30 Yes No 4.0 3.3 3 67 83 0.3 Belarus 50 Yes Yes 0.7 2.3 74 1.2 315 Belgium 0 No Yes 3.5 20 60 100 0.1 Bhutan 20 No Yes 6.0 3.0 42 0 68 0.2 52 Bolivia 100 No No 9.0 2.5 98 2 100 0.3 29 Botswana 100 Yes Yes 4.0 2.5 17 52 58 0.1 55 Brazil 100 No 4.3 3.3 100 0 85 21.1 BritishVirginIslands 0 No No 1.0 3.0 0 63 91 0.1 Burundi 0 No No 3.5 71 16 67 0.3 Cambodia 100 Yes No 1.8 0 76 0.2 154 Canada No 0.0 1.8 98 0 1,1513 Cayman Islands 50 Yes Yes 3.0 2.8 32 12 59 0.2 97 Chile 100 No Yes 1.0 3.5 75 0.0 China 20 Yes Yes 0.8 1.8 7 37 57 1.2 Croatia 27 Yes No 1.5 2.0 11 3 80 1.5 76 Cyprus Yes Yes 2.0 2.0 26 19 74 0.5 125 CzechRepublic 40 Yes Yes 0.2 2.0 0 79 3.6 121 Denmark 70 No No 8.0 3.3 4 67 65 0.0 Egypt 90 Yes Yes 1.0 3.3 13 7 75 0.2 62 El Salvador 33 Yes Yes 2.5 2.0 85 0 95 0.4 59 Estonia 100 Yes Yes 0.1 1.8 8 22 97 0.2 Finland Yes Yes 1.5 0 70 0.6 147 France 0 No Yes 1.0 3.5 76 0 100 0.4 40 Gambia 100 Yes No 1.0 13 4 42 12 3.9 313 Germany 0 No No 1.0 3.0 54 38 78 0.1 19 Ghana Yes No 6.3 2.5 100 0 40 86.2 Gibraltar 50 Yes Yes 1.5 2.3 5 13 70 0.2 100 Greece 0 Yes Yes 2.5 3.3 5 8 38 0.3 28 Guatemala No No 0.1 2.0 100 0 48 121.5 | Guernsey 0 No Yes 1.7 2.3 16 19 14 1.0 _ Guyana Yes No 12.0 2.3 2 1 52 0.4 Honduras Yes No 1.0 2.3 62 3 0.4 Hungary_| Yes Yes 2.8 0 64 1.5 | Iceland Yes No 5.5 2.5 0 80 42 0.0 48 India 100 Yes Yes 3.0 3.5 7 44 53 0.1 101 Indonesia 0 Yes No 0.3 2.0 _ 1.6 _ _ Ireland 50 No No 3.3 _ so80 0.4 147 Israel I Yes Yes 2.5 5 17 25 1.6 150 Italy r 36 Table 2 Some Basic Differences in Banking Systems Around the World Total bank assets / GDP (percent) Number of banks per 100,000 People Jamaica Japan 74 Jordan 214 56 98 109 0.2 0.2 0.4 0.2 0.0 0.4 1.0 2.0 0.1 40.6 0.3 48.3 5.0 Kenya Korea S. Kuwait Latvia Lebanon Lesotho Liechtenstein Lithuania Luxembourg Macau Macedonia Malawi Malaysia Maldives Malta Mauritius Mexico Moldova Morocco Namibia Nepal Netherlands New Zealand Nigeria Oman Panama Peru Philippines Poland Portugal Puerto Rico Oatar Romania Russia Rwanda Saint Kitts and Nevis Samoa (Western) Saudi Arabia Seychelles Singapore Slovenia 252 1.1 166 291 96 30 25 89 32 358 154 28 64 386 36 91 54 238 25 16 16 171 ._____ 93 66 0.1 0.2 1.3 1.3 1.8 0.1 0.4 0.1 0.3 0.1 5.1 0.5 0.0 0.7 3.0 0.1 0.1 0.2 0.6 0.4 1.9 0.2 0.9 0.1 102.3 1.3 0.0 7.6 3.9 1.2 Percent of total Percent of total Percent of deposits bank asset bank asset accounted for by 5 government owned foreign owned largest banks 94 31 68 62 48 40 56 90 90 27 74 77 73 30 100 91 80 71 75 100 55 88 91 51 77 30 81 46 57 82 76 76 59 80 100 24 100 69 56 1 0 _ 49 0 75 0 0 25 7 24 0 0 . 27 49 1 48 95 12 93 8 18 25 49 26 20 33 19 20 35 30 0 0 51 4 44 5 1 1 6 0 13 0 12 3 12 44 21 0 43 70 68 50 21 0 0 0 0 64 44 6 68 40 99 0 11 38 40 13 26 12 31 15 8 9 50 65 93 0 50 5 Overall bank activities and ownership restrictiveness Professional supervisors per bank 3.0 3.3 2.8 2.5 2.3 2.5 2.0 2.8 3.0 2.3 2.3 1.5 2.3 3.3 3.3 2.5 2.5 2.5 3.3 3.0 1.8 3.3 2.8 2.0 1.5 1.0 2.3 3.3 2.0 2.0 1.8 2.5 2.3 3.5 2.8 3.3 2.0 3.3 3.3 3.5 2.8 2.0 2.0 2.3 1.4 Percent of 10 Are supervisors Explicit deposit biggest banks rated insurance legally hable for by int'l agencies scheme their actions? No No No No No No 3.0 1.0 5.7 1.4 Yes Yes Yes No Yes No 2.5 2.0 0.5 0.8 0.2 3.0 0.6 1.0 4.7 0.0 2.0 3.0 11.5 1.1 3.0 5.0 4.0 No No Yes Yes Yes No No No No No _ No No Yes Yes Yes Yes No Yes No No Yes No No 0.6 3.0 0.6 3.6 7.0 2.4 0.5 4.0 1.0 2.0 2.4 1.0 0.5 1.0 7.0 1.0 0.2 . Yes No No No Yes Yes No Yes Yes No Yes Yes No Yes Yes Yes No Yes No No No No No Yes No Yes 0 100 __ __ 0 100 100 , 100 0 10 40 70 40 0 100 0 30 10 0 40 No No Yes No Yes Yes No Yes No Yes Yes Yes No Yes No No No No No No No No 0 30 100 0 100 50 60 80 100 100 IOW 70 37 Table 2 Some Basic Differences in Banking Systems Around the World Percent of 10 Total bank Number of Percent of deposits Percent of total Percent of total Overall bank activities Professional Are supervisors Explicit deposit and ownership supervisors legallyliable for insurance biggest banks rated assets / GDP banks per accounted for by 5 bank assets bank assets by int'l agencies restrictiveness per bank their actions? scheme largest banks government owned foreign owned (percent) 100,000People SolomonIslands SouthAfrica Spain Sri Lanka Sweden Switzerland Taiwan Tajikistan Thailand Tonga Trinidadand Tobago Turkey Turks and CaicosIslan UnitedKingdom UnitedStates Vanuatu Venezuela Vietnam Zambia 0.7 90 156 0.1 0.8 129 539 0.2 5.5 9 0.2 0.3 117 52 0.1 6 0.0 2.8 0.5 0.1 52.9 311 0.8 66 126 6 3.9 2.6 0.1 0.1 0.2 10 100 85 49 _ 0 0 55 65 0 15 15 43 90 5 11 2 3.3 2.0 1.8 1.8 2.3 9 1.3 3.0 7 6 1.5 75 31 100 7 100 2.3 2.5 75 0 15 50 35 100 5 0 21 100 64 65 83 0 10 5 8 2.3 66 90 3.0 2.8 5 25 34 3.0 3.5 2.5 1.3 3.5 23 64 3.3 0.5 3.0 0.6 18.0 2.1 10.0 1.0 6.0 0.4 0.1 0.7 0.1 1.0 1.0 3.0 2.0 No Yes No No No No Yes Yes No Yes No Yes No No No No No No No Yes No Yes Yes No Yes No No Yes Yes No Yes Yes No Yes No No 0 70 100 40 40 100 90 70 100 100 40 0 38 Table 3 Information on Bank Structural, Regulatory, Supervisory and Deposit Insurance Variables Numberof countries Variable providing Standard Minimum Maximum ivalue value Mean Median deviation information 1. Jank Ac'vity Regulatory Variables I(a) SecuritiesActivities (b)InsuranceActivities I(c)Rea EstateActivities 2. Miring Banking/ComtnerceRegulatory Variables l(a) BankOwnershipof NonfinancialFirns (b) NonfinancialFirm Ownershipof Banks 3. Conq,eXion Regulatory Varables _(a)Limitationson ForeignBank Ownershipof DomesticBanks (b)Limitations onForeignBankEntry (cj Entryinto Bankin Re uirements deviatio 1.87 2.00 0.88 1.00 107 107 2.73 2.90 2,00 3.00 1.00 1.07 1.00 107 107 2.45 2.04 3.00 2.00 0.80 0.91 1.00 1.00 76 0.24 0000 0.43 76 0.13 7.33 0,00 0.34 8.00 1.09 J | 4. Capital Regulatory Variabks (a) OverallCapitalStinency (b) Initial CapitalStringency (c) CapitalRegulatoryIndex (d) MaximumCapitalPercentageby Single Owner 105 104 104 106 3.45 4.00 1.56 4.99 66.93 2.00 5.00 100.00 1.49 0.83 1.79 40.58 5. OfficialSopervisoryActionVarWabs (a) OfficialSupervisoryPower 105 11.10 12.00 105 2.00 0.00 103 2.57 3.00 104 60 105 105 1.61 401.67 107.73 1.93 2.00 411.00 160.00 2.00 [(2)Restructuring Power (b) SupervisoryForbearanceDiscretion (c)Loan ClassificationStringency [(d)ProvisioningStringency (e) Liquidity/ DiversificationIndex _ 6 Offici SupervisoryResource Variables (a) Supervisorsper Bank |(b) Bank SupervisorYears per Bank (c) SupervisorTenure |(d) Onsite ExaminationFrequency (e) LikelihoodSupervisorMovesintoBanking (f) Independenceof SupervisoryAuthoritX E | value 107 105 (1)PromptCorrective Action v 92 73 79 91 101 103 J2.68 | | 27.22 7.45 1.53 1.82 1.71 J -1.50 9.80 | 6.00 1.00 2.00 | 1.00 1.00 L 4.00 J 4.00 | 4.00 4.00 L 4.00 0|00 | | 0.00 2.00 1.00 J 1.00 8.00 1.00 0.00 1.00 2.00 6.00 3.00 9.00 100.00 2.76 3.00 16.00 2.43 0.00 6.00 0.81 0.00 3.00 0.98 390.31 77.33 | 0.82 0.00 31.00 0.00 0.00 4.00 2,520.00 205.00 3,00 3.05 47.24 4.87 0.71 0.88 0 0.00 0.09 1.00 0.50 0.00 1.00 18.00 270.00 25.00 5.00 3,00 3.00 0.25 40.83 0.56 0.49 1.65 0.00 0.00 1.00 0.00 2.00 1.00 100.00 1.02 0.49 11.46 5.52 2.48 0.00 0.00 0.03 0.00 -2.49 3.00 1.00 60.00 34.70 3.98 22.92 32.60 23.18 109.31| 104.45 7.96 0.29 | 0.44 0.44 31.54 32.95 30.27 12.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0o00 000 0.00 | Z Private Monitoring Variables (a) CertifiedAudit Required (b) Percentof 10Biggest BanksRated by InternationalRatingAgencies (c)AccountingDisclosureand DirectorLiability 1 (d) No Explicit DepositInsuranceScheme (e) Private MonitoringIndex J 8. Deposit InsuranceScheme Variables (a) DepositInsurerPower (b) ExtraDepositInsuranceCoverage (c) Deposit InsurancePayoutDelay (d)Deposit InsuranceFunds-to-TotalBankAssets (e) MoralHazard Index | 105 76 97 105 106 0.93 51.58 j 1.00 50.00 2.63 3.00 0.40 6.71 0.00 7.00 60 46 37 39 34 0.73 0.37 6.71 1.45 0.70 0.00 0.00 3.00 0.22 1.2 95 91 99 84 92 88 95 96 91 75 65 67 68.26 33.13 19.29 22.69 17.22 5.19 0.09 0.26 0.26 23.16 2011 21,12 73.30 19.90 7.61 4.00 1.50 1.00 0.00 0.00 0.00 6.67 0.00 0.00 | 1 | | 3.00 1.00 11.00 T J | 9. MarketStructure Inibcators (a) BankConcentration (b) ForeignBankOwnership (c) GovernmentOwned Banks (d) Numberof New Banks (1) New DomesticBanks (2) New ForeignBanks (e) No Entry Applications (1) No DomesticApplications (2) No ForeignApplications (f) Fraction of EntryApplicationsDenied (1) ForeignDenials (2) Domestic Denials 100.00 100.00 80,00 999.00 99600 3600 1.00 1.00 1.00 100.00 100.00 100.00 39 Table 4 PrudentialBankRegmlationsandTheirEnforcement Any mandatory Moat infractionsof any prudentialregulationfoundby actionsin these cases? a supervisorbe reported? Who authoriz exceptionsto sach acffons m ts wer? yes yes yes yes yes yes yes not reported no yes no no no yes yes no yes not reported no yes not applicable not applicable APRA SupervisoryAuthority Governor,Deputy Governor Headof SupervisoryAuthority Boardof National Bank not reported Governor Noexceptionsthoughbanks havethe provisionto appealto the Superintendenciade Recursos Jerarquicos not applicable not applicable O 0 few 0 not available not reported 0 0 Botswana yes yes Boardof the Bankof Botswana 0 Brazil yes yes no one BritishVirginIslands yes yes Governor in Councilon recommendationsof the Directorof FinancialServicesor the Inspectorof Banks Burundi Cambodia Canada Cayman Islands Chile China Croatia Cyprus yes yes Governor of CB yes yes yes yes yes yes yes yes no yes yes yes yes yes Governor not applicable CIMA Superintendent Vice Governorof the People'sBankof China not reported Bank SupervisionDepartmentand the Governor 0 not applicable not available not available not reported not reported very few yes Governoror head of bankingsupervisionor head of many Argentina Aruba Australia Austria Bahrain Bangladesh Belarus Belgium Bhutan Bolivia CzechRepublic _______________ yes ______________________ ___________ yes Denmark Egypt El Salvador Estonia Finland France Gambia,The Germanv Ghana Gibraltar Greece yes yis yes yes yes yes not reported yes, intemallyonly yes yes yes yes yes yes knotreported no no yes yes yes Guatemala Guemsey Guyana Honduras Hungu1y Iceland India Indonesia Ireland Israel Italy Jamaica Japan Jordan Kenya Korea Kuwait* Latvia yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes no yes yes yes yes no yes no yes yes yes yes yes yes yes yes yes negligibleand generallyrelatingto minor matterssuch as transferor small shareholdingwithout prior approval bankinginspection Danish FinancialSupervisoryAuthority Centa Bank of Directors Board of Directorsof the Superintendence Court FSA, if it is spulatedin legislation not reported not reported not reported Governor Commissionerof Banking A committeepresidedby the Governorof the Bank of Greecetakes the decisionto imposesanctionsor authonzeexceptions no exceptions Commissioners Governor/Directorof BankSupervisionDept Commisionof Banks no exceptions Board of the FSA Board of each respectivebank noexceptions not applicable Supervisorof Banks no exceptions none allowed no exceptions Boradof Directorsor the Governor Ministryof Finance no exceptions Governoror CB Board of Directors not reported 0 6 not reported 0 24 not reported not reported not reported 0 0 5 not applicable not reported not available not reported not applicable 0 not available 0 not applicable 0 not applicable not applicable no exceptions 0 0 not applicable rarely not reported 40 Table 4 PrudentialBank RegulationsandTheir Enforcement Mustinfractionsof any Any mandatory prudentialregulationfoundby actionsin these a supervisorbe reported? cases? Who authorizesexceptionsto such actions Hast year? Lebanon yes yes Lesotho Liechtenstein Lituania Luxembourg Macau yes yes yes yes yes yes yes no yes yes Macedonia Malawi yes yes yes yes Malaysia Maldives Malta yes yes yes yes yes yes not reported GeneralManager,EconomicServicesupon the adviceof Director,Bank Supervision Ministerof Financeor Govemor no exceptions Governorand senior officialsof the supervisory Mauritius Mexico yes yes yes yes no exceptions NationalBankingand Security Commission not applicable not reported Moldova Morocco yes yes yes yes no exceptions Govemor not applicable not reported Namibia yes yes Nepal Netherlands NewZealand Nigeria Oman Panama Peru Philippines Poland Portugal PuertoRico Qatar Romania Russia yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes yes no yes yes no yes yes yes no no yes no yes Govemoror Board of Directorsof Central Bank NederlandscheBank not applicable Govemorof CBN ExecutivePresident,CB Superintendentof Banks no exceptions MonetaryBoard of theCB Commisionfor BankingSupervision not applicable Commission Govemor notapplicable The procedurefor inspectingcredit institutions includingdeterminingthe duties of credit insitutions in assistinginspectionis set by the Board of Rwanda Samoa(Westem) SaudiArabia yes yes yes yes yes yes BanqueNacionaldu Rwanda not reported no exceptions 0 not reported 0 Seychelles yeyes Singapore Slovenia SolomonIslands South Africa Spain Sri Lanka St. Kitts Sweden Switzerland Taiwan(China) Tajikistan Thailand yes yes yes yes yes yes yes yes yes yes yes yes not reported yes no no yes yes no yes yes yes yes yes not reported GoverningBoard of the CentralBank not applicable Registrarof Banks Bank of Spain MonetaryBoard not applicable Finansinspektionen FederalCommissionof Banks(CFB) Ministryof Finance NationalBank of Tajikistan SeniorDirectoror Director,SupervisionDepartment not reported 0 0 many 0 0 not applicable 0 not reported 0 0 not reported Tonga yes yes NRBTBoard of Directors 0 Govemorand higherBankingCouncil authorizes certainexceptions,takinginto considerationthe BCC recommendationsand on conditionthat these infractionsbe clearedwithin a determinedperiodof time Govemor/Ministerof Finance not reported not applicable no exceptions Secretaryof Economyand Financeon the recommendationof MonetrayAuthorityof Macau fey, not available not reported not applicable 0 0 not reported 0 O not applicable 0 department Govemor 0 O 0 not applicable 0 0 0 0 0 0 not applicable 0 not reported not applicable not reported Directors, Central Bank 0 yes 41 Table 4 PrudentialBank Regulationsand TheirEnforcement Any mandatory MustInfractionsof any prudentialregulation found by actions in these caxs?e a supervisorbe reported? Trinidad& Tobago Turkey Turks and Caicos UnitedKingdom UnitedStates Vanuatu Venezuela Vietnam Zambia yes yes yes yes yes yes yae not reported yes yes yes yes no no ya not reported y Who authorizes exceptions to such actions Inspectorof Banks no exceptions Govemoror Pemanent Secretaryof Finance not applicable not applicable Ministerof Finance no exceptions not reported Bankof Zambia last were 0 0 not reported not applicable not applicable 0 0 not reported few 42 Table 5 Informationon BankStructural,Regulatory,Supervisoryand DepositInsuranceVariables:Averagesby Income Level Varbable High income Upper middle income Lower middle income Lower income Developed countries 1.43 2.32 2.38 1.96 2.60 3.00 2.23 2.81 3.15 2.11 3.58 3.42 1.37 2.22 2.04 2.27 1.97 2.36 2.00 1 017 0.07 7.17 0.44 0.11 7.33 Regulatory Variables (a) Overall Capital Stringency (b Initial Capital Stringency (c) Capital Regulatory Index 3.89 169 5.60 (d) Maximum Capital Percentage by Single Owner Developing or | Offshore emerging markets | centres L Bank Aicvity Regulatory Variables _ 1 _(a) Securities Activities (b) Insurance Activities (c) Real Estate Activities | 2.04 2.90 3.19 1.88 2.75 3.00 2. MixingBankinglComnmerce Regulatory Variables |(a) Bank Ownership of Nonfinancial Firms | (b) Nonfinancial FrmOwnership ofBanks 3. Compedtion Regulatory Variables _(a) Limitations on Foreign Bank Ownership of Domestic Banks (b) Limitations on Foreign Bank Entry _c) Entry into Banking Requirements | 2.77 2.19 | 2.47 2.00 | 2.22 1.77 J 2.53 213 _ 2.00 2.59 1 0.19 0.24 7.50 014 0.14 7.42 008 0.04 7.19 0.31 0.17 7.38 0.00 0.00 7.50 3.54 1.58 5.13 3.00 1.48 4.42 311 1.37 4.47 4.19 1.85 6-08 3.20 1.46 4.65 2.13 t1.13 3.25 80.46 59.96 61.92 56.06 88.70 59.49 50.63 10.64 1.25 2.46 1.21 1.92 331.00 42.43 1.94 11.67 3.08 2.58 1.75 1.33 284.12 134.29 2.04 11.04 1.69 2.64 1.77 1.35 342.29 149.80 2.00 11.37 2.47 2.68 1.50 1.72 631.00 146.00 I 1.68 | 11.08 1.19 2.50 1.27 1.96 280.33 33.70 2.04 11.11 2.27 2.60 1.62 1.49 408.05 133.36 1.90 4. Capital 5. OfficialSupervisory Action Variables (a) Official Supervisory Power | (1)PromptCorrectiveAction | (2)RestructuringPower (3) Declaring Insolvency Power (b) Supervisory Forbearance Discretion (c) Loan Classification Stringency i(d) Provisioning Stringency v(e) Liquidity / Diversification Index 6. Official Supervisory Resource | | | | | | 1 | 10.00 0.75 2.13 1.00 2.13 290.00 | 73.13 1 1.38 Variables (a) Supervisors perBank (b) Bank Supervisor Years per Bank (c)Supervisor Tenure (d) Onsite Examination Frequency (e) Likelihood Supervisor Moves into Banking m(tlIndependenceofSupervisoryAuthority | 1.71 21.65 7.86 1.71 1.94 2.00 | 3.47 25.72 7.28 1.43 1.75 1.54 3.27 50.48 8.80 1.39 1.96 1.63 1.00 66.65 0.92 47.50 | | 2.33 12.87 5.64 1.56 1.53 1.47 0.94 10.96 8.57 1.70 1.92 2.19 3.13 31.79 7.14 1.49 1.79 1.55 0.89 6.67 0.96 68.50 0.92 44.69 | | 1 1.94 9.12 4.25 1.86 1.57 1.38 7. PrIvate Monitoring Variables (a) Certified Audit Required (b) Percent of 10 Biggest Banks Rated by Intemational Rating Agencies (c) Accounting Disclosure and Director Liability (d) No Explicit Deposit Insurance Scheme (e) Private Monitoring Index 0.92 6882 I I 2.60 0.33 7,14 8. Deposit Insurance Scheme Variables (a) Deposit Insurer Power (b) Extra Deposit Insurance Coverage (c) Deposit Insurance Payout Delay (d) Deposit Insurance Funds-to-Total Bank Assets (e Moral Hazard Index - 9. Market Structure Indicators (a) Bank Concentration (b)ForeignBankOwnership (c) Govemment Owned Banks (d)NurnberofNewBanks (I) New Domestic Banks (2) New Foreign Banks (e)NoEntryApplications (I)NoDo esticApplications (2)NoForeignApplications (f) Fraction of Entry Applications Denied ()IForeignDenials (2) Domestic Denials 0.83 0.50 4.73 3.03 0.92 63.75 33.57 -10.28 49.29 36.37 9.26 0.09 0.31 0.16 7.69 7.16 6.91 I 2.91 | | [ [ [ I 0.88 32.50 I 2.54 2.44 2.54 2.66 0.28 7.21 0.44 6.54 0.63 5.47 0.08 6.85 0.51 6.66 0.76 0.25 2.77 0.27 0.84 0.46 0.50 7.95 0.53 -0.53 0.86 0.00 21.06 1.27 1.31 0.83 0.50 4.73 3.03 1.32 0.68 0.30 8.23 0.56 0.08 0.50 0.00 N/A 0.11 N/A 66.48 31.72 12.32 6.29 2.83 3.47 0.14 0.25 0.30 11.99 8.33 16.85 72.35 33.75 28.32 4.84 6.82 1.70 0.13 0.30 0.43 32.22 28.04 30.83 72.91 33.59 35.36 10.53 6.47 3.89 0.00 0.11 0.22 49.32 49.82 37.85 60.92 24.81 10.27 64.39 50.60 10.78 0.04 0.24 0.08 3.21 2.13 3.21 70.47 35.47 22.34 6.97 4.76 3.22 0.11 0.27 0.33 31.45 29.32 28.21 69.51 70.55 12.38 7.67 2.29 4.29 w0.13 0.25 0.25 36.67 19.05 40.99 | | | | | 2.83 | 0.63 6.38 43 Table 6 Information on Bank Structural, Regulatory, Supervisory and Deposit Insurance Variables: Averages by Region Variable Sot and MiddleEast Eujrope Asia& 1 East CentralAsia and North | Pacific |Amicas Non-J Sub-. Saharan OECD OECD Non-EU EU J Non- Euroland Euroland L Bank AdivityRegulatory Variables _(a)SecuritiesActivities 2.18 2.41 1.51 1.45 1.67 2.07 2.00 1.50 1.99 1.13 1.96 1.09 Activities (b) Insurance (c)RealEstateActivities 2.59 2.82 2.76 3.24 2.27 2.27 3.45 3.73 3.17 3.33 3.36 3.43 2.90 3.16 2.25 2.14 2.82 1 3.07 2.20 1.87 2.79 3.02 2.18 1.82 (a) BankOnership ofNonfinancialFirms 2.59 2.65 2.27 200 2.43 2.51 2.29 2.51 2.07 250 FimOwnershi ofBanks (b)Nonfinancial 2.17 2.35 1.73 1.82 317 1.93 2.12 1.79 2.12 1.53 | 209 0.20 0.63 0.06 0.50 2. Mixing [ j L Banking/Commnerce Regulatory Variables | 2.73 | 3. CompetItlon Regulatory Variables onForeignBank _(a)Limitations (b)LimitationsoniForeignBankEntry Requirements (c)EntryintoBanking 4. CapitalRegulatory Variables L(a) _ 0.67 014 0.67 0.14 027 1 0.2 1 4 016 1 029 10001 028 1 0.1 | 0.2 | 0.0 |I 0.2 | | 0.15 0.00 0.25 0.06 0.10 0.33 0.00 0.18 0.04 0.16 0.00 | 0.00 7.32 7.12 7.39 7.36 6.67 7.77 7.40 7.15 7.38 7.07 | 7.40 | 6.73 2.94 3.72 1.86 5.58 4.00 3.00 3.54 3.23 4.07 3.30 4.33 1.45 1.40 | 1.15 1.43 1.93 1.49 1.93 3.32 1.53 5.45 4.17 4.69 4.64 6.04 4.78 6.27 41.50 53.57 62.77 78.54 61.48 100.00 63.11 100.00 10.67 10.89 11.24 10.27 11.16 10.64 0.73 2.33 1.20 2.07 630.00 | 26.67 2.13 2.14 2.60 1.57 1.54 397.80 118.74 IS 1.88 0.82 2.36 1.18 2.18 630.00 13.64 2.36 | 1.36 1.59 4.55 4.50 74.09 51.19 80.41 61.09 10.64 11.00 11.08 12.55 11.08 11.18 1.55 2.55 1.67 1.55 | 321.81 | 120.82 1.59 2.24 2.88 1.67 1.56 298.60 119.19 1.71 1.61 2.51 1.39 1.69 254.55 71.54 2.03 3.64 2.55 1.55 1.09 285.83 118.18 2.64 0.00 2.67 0.83 2.67 | 1303.00 | 1 115.83 1.67 3.08 2.38 1.85 1.46 411.25 161.92 2.08 2.18 | 2.58 1.57 1.49 414.63 129.17 | 1.92 | 4.03 69.27 9.14 1.20 1.59 1.47 1.31 11.25 7.08 1.70 1.97 1.97 3.24 44.81 9.46 1.68 1.67 2.00 J 4.38 30.83 4.90 1.60 1.40 1.50 2.50 13.38 6.20 1.54 1.57 1.33 2.97 30.52 | 7.12 1.45 1.84 1.55 1.62 13.34 8.84 1.84 1.77 2.15 0.82 74.17 0.94 56.92 0.91 65.56 | 1.00 0.00 0.92 16.36 0.92 42.04 0.96 75.00 2.51 0.11 6.41 3.00 0.55 8.45 (d)MaximumCapitalPercentagebySingleOwner 4.55 1.82 6.36 64.3 Variables Power OfficialSupervisory (1)PromptCorrectiveAction (2) RestructuringPower (3)DeclaringInsolvencyPower (b)SupervisoryForbearanceDiscretion. (c) LoanClassificationStringency d)Provisionin Stringency (e) Liquidity/DiversificationIndex | 6t Officlal Supervisory Resource Variables a SupervisorsperBank (b)BankSupervisorYearsperBank (c) SupervisorTenure (d) OnsiteExaminationFrequency (e) LikelihoodSupervisorMoves into Banking (f) IndependenceofSupervisoryAuthority Z Private Monitoring 0.5 1.55 0.27 3.18 (a) OverallCapitalStringency (b) InitialCapitalStringency (c) CapitalRegulatoryIndex 5. OffidiatSupervlsoryAdon 1_ 0.. OwnershipofDomesticBanks 2.00 | 3.18 26.06 7.76 1.45 2.09 1.59 | | 1 2.21 1.48 2.61 2.56 1.59 1.41 1.53 1.93 397.80 285.00 48.79 1 121.24 1.90 1.96 | 2.96 29.86 7.19 1.47 1.78 1.61 2.88 29.29 7.27 1.49 1.79 1.62 | | | | | | 0.55 4.17 9.35 1.89 2.10 2.45 | 0.91 70.00 | | 0.61 5.78 9.48 2.00 207 227 | 0.93 66.15 0.94 4910 2.40 0.00 6.67 2.66 0.45 6.72 j | Variables (a) CertifiedAuditRequired (b)PercentoflOBiggestBanksRatedby InternationalRating Agencies (c) AccountingDisclosureand DirectorLiability (d) NoExplicitDepositInsuranceScheme e) PrivateMonitoringIndex I 1.00 55.71 I I 2.75 0.32 6.73 2.57 0.76 7.00 | J j 4 2.50 0.67 5.33 2.54 0.57 6.31 0.93 48.57 _ _ _ _ | 2.66 0.51 6.69 2.54 007 6.75 2.67 0.47 6.71 J | | 2.36 0.00 6.64 44 Table 6 Information on Bank Structural, Regulatory, Supervisory and Deposit Insurance Variables: Averages by Region MiddleEast and EastAsia& Europie Americas iPaciic Variable ] Central Asia [ South and North Asi ~~~~~~~Africa _ _ __] SubSaharan Africa Non- NonOECD OED | -U Euroland EU 1_ _ _ _ _ _ _ Eurond _ 8. Deposit Insurance 9. Scheme Variables _ Deposit Insurer Power (b) Extra Deposit Insurance Coverage (c) Deposit Insurance Payout Delay 1.27 0.42 5.46 1.00 0.00 5.56 0.50 0.45 5.47 0.50 0.00 0.03 0.50 1.00 6.00 0.67 0.25 30.75 0.80 0.32 9.55 0.64 0.43 4.30 0.82 0.34 7.73 0.47 0.45 4.32 0.76 0.35 7.34 0.64 0.44 4.44 (d) Deposit Insurance Funds-to-Total Bank Assets 0.34 0.11 2.51 0.35 0.12 2.04 0.58 2.70 0.54 4.98 0.57 7.41 (e) Moral Hazard Index 1.24 -0.60 1.48 -2.49 2.95 0.77 -0.77 1.87 011 1.94 0.23 2.02 69.57 34.98 20.70 22.14 17.47 4.16 0.11 0.27 0.29 27.25 24.29 24.21 _ 59.19 16.29 9.98 25.69 15.79 11.15 0.00 0.21 0.08 3.67 1.67 5.42 69.68 34.23 19.93 21.59 17.02 4.13 0.11 0.26 0.28 26.23 22.99 23.53 56.17 19.97 12.97 30.80 18.64 13.50 0.00 0.27 0.10 3.23 2.22 3.37 _ MarketStructire Indicators (a) Bank Concentration (b) Foreign Bank Ownership (c) Government Owned Banks (d)NumberofNewBanks (1) New Domestic Banks (2) New Foreign Banks (e)No Entry Applications (1) No Domestic Applications (2) No Foreign Applications (fl Fraction ofEntry Applications Denied (I )Foreign Denials _ (2) Domestic Denials 62.47 39.27 12.20 60.50 54.84 2.47 0.14 0.19 0.29 14.82 11.96 13.74 66.80 42.20 13.20 8.23 7.31 6.23 0.20 0.50 0.31 43.50 38.35 38.96 65.42 28.70 19.33 18.24 10.10 8.86 0.03 0.19 0.13 8.19 6.30 12.95 72.04 24.56 13.76 2.56 0.70 1.70 0.20 0.60 0.50 19.05 20.00 12.50 65.45 17.29 59.98 21.40 14.40 5.83 0.00 0.20 0.50 69.41 56.92 64.63 82.77 35.89 24.10 5.10 3.00 1.82 0.00 0.00 0.18 37.01 40.74 24.09 70.96 36.18 21.17 6.73 4.50 3.11 0.11 0.28 0.32 30.43 28.29 26.45 59.78 22.97 14.03 67.68 53.25 11.45 0.04 0.21 0.09 4.48 1.71 7.67 45 Table 7a Correlations Among Selected Variables Securities activities Insurance activities Real estate activities Securities activities - 0.37 (0.00) 104 0.41 (0.00) 104 0.16 (0.10) 104 0.29 (0.00) 104 Insurance activities 0.37 (0.00) 104 - 0.48 (0.00) 104 0.14 (0.15) 104 0.13 (0.20) 104 Real estate activities 0.41 (0.00) 104 0.48 (0.00) 104 - 0.29 (0.00) 104 0.19 (0.05) 104 Ban ownership0.16 Bank ownership of (0.10) nonfinancialfirms 104 0.14 (0.15) 104 0.29 (0.00) 104 - 0.07 (0.49) 104 Nonfinancialfirm pnofirbank(0.00) ownership of banks 0.13 (0.20) 104 0.19 (0.04) 104 0.07 (0.49) 104 - 0.29 104 Bank ownership of Nonfinancialfirm nonfinancialfirmnsownership of banks Note: The top number is the Pearson correlationcoefficient,the middle number the P-value, and the bottom number is the number of countries providinginformationfor the two variables. 46 Table 7b Correlations Among Selected Variables Securities activities Insurance activities Real estate activities Moral hazard index * 0.01 (0.96) 34 -0.15 (0.39) 34 -0.22 (0.21) 34 -0.05 (0.77) 34 -0.11 (0.52) 34 Private monitoring index -0.27 (0.01) 104 -0.26 (0.01) 104 0.02 (0.84) 104 0.03 (0.77) 104 0.01 (0.94) 104 powver 0.07 (0.49) 104 -0.06 (0.56) 104 0.04 (0.67) 104 0.09 (0.38) 104 -0.03 (0.75) 104 Prompt corrective action 0.04 (0.71) 0.18 (0.07) 0.08 (0.43) 0.07 (0.48) 0.03 (0.79) 104 104 104 104 104 Officia supervisory Officialsupervisor' Bank ownership of Nonfinancialfirm nonfinancialfirms ownershipof banks Note: The top number is the Pearson correlationcoefficient,the middle numberthe P-value, and the bottom number is the number of countries providinginformationfor the two variables. * This variable is obtained from Demirglis-Kuntand Detragiache(2000). 47 Table7c CorrelationsAmongSelectedVariables Moral hazard Private monitoring Officialsupervisory Promptcorrective index index power action - -0.34 (0.05) 34 0.18 (0.30) 34 0.09 (0.61) 34 Privatemonitoringindex -0.34 (0.05) 34 - 0.22 (0.03) 105 0.15 (0.12) 105 Officialsupervisory power 0.18 (0.30) 0.22 (0.03) - 0.49 (0.00) Promptcorrectiveaction 0.09 (0.61) 34 0.15 (0.12) 105 0.48 (0.00) 105 Moral hazard index* - Note: The top numberis the Pearsoncorrelationcoefficient,the middlenumberthe Pvalue, and the bottomnumber is the numberof countriesprovidinginformationfor the two variables. * This variableis obtainedfrom Demirgtl0-Kuntand Detragiache(2000). 48 Table 7d Correlations Among Selected Variables Variable Variable P-Value Number of ~~~~~~~~~~~~~coefricient PVle countries Pearson correlation OnsiteExaminationFrequencyvs. Supervisorsper Bank -0.17 0.12 81 OnsiteExaminationFrequencyvs. Bank SupervisorYears per Bank 0.21 0.10 6C OnsiteExaminationFrequencyvs. SupervisorTenure -0.18 0.13 70 Supervisorsper Bankvs. BankSupervisorYears per Bank 0.88 0.00 7T3 Supervisorsper Bank vs. SupervisorTenure 0.38 0.00 74. Limitson ForeignBank Entryvs. Limits on ForeignBankOwnershipof DomesticBanks 0.33 0.00 76 GovernmentOwnedBanksvs. Limitson ForeignBankEntry 0.22 0.07 6" GovernmentOwnedBanksvs. ForeignBankOwnership -0.33 0.00 8'> GovernmentOwnedBanksvs. Fractionof EntryApplicationDenied 0.39 0.00 71 GovernmentOwnedBanksvs. Private MonitoringIndex -0.33 0.00 9 SupervisoryForbearanceDiscretionvs. DeclaringInsolvencyPower -0.20 0 05 1002 SupervisoryForbearanceDiscretionvs. Loan ClassificationStringency -0.22 0 09 59 SupervisoryForbearanceDiscretionvs. ProvisioningStringency 0.34 0.00 ICi SupervisoryForbearanceDiscretionvs. Private MonitoringIndex -0.11 0.27 10.1 SupervisoryForbearanceDiscretionvs.PromptCorrectiveAction -0.71 0.00 1041 Private MonitoringIndex vs. Loan ClassificationStringency 0.21 0.] 61 Private MonitoringIndexvs. ProvisioningStringency -0.11 0.26 1CX Private MonitoringIndex vs. CapitalRegulatoryIndex 0.17 0.09 I1C4 Prompt CorrectiveActionvs. Loan ClassificationStringency 0.22 0.10 6t Prompt CorrectiveActionvs. ProvisioningStringency 0.33 0.00 1O4 Moral HazardIndex7vs. DepositInsuranceAuthorityPower -0.11 0.59 2i Moral Hazard Index vs. DepositInsuranceFunds to TotalBank Assets -0.13 0.68 13 MaximumCapitalby SingleOwnervs. Actual Risk-AdjustedCapital 0.24 0.02 9! _ * This variable is obtained from Demirguc~-Kuntand Detragiache (2000). Note: The Loan Classification Stringency variable has been changed so that higher values indicate more stringency. 49 Figure 1 Regulatory Restrictions on Bank Activities and the Mixing of Banking and Commerce: Percentage Distribution of 107 Countriesby Degree of Restrictiveness Unrestricted Nonfinancial firm ownmershipof banks Bank ownership of nonfinancial Perrnitted t>=...... - ~ 3' I E3 Restricted Prohibited ..... - _____..........___.... firms'~ Real estate .... Insurance i>< Securities n4 0% __.._ __YU_ I< INN> 20% __ NIL 40% 60% 80% 100% 50 Figure 2 Total Bank Assets / GDP Switzerland Panama Panama -__________________ Belgium Netherlands in1 N n m m ______________ Germany 313% UnitedKingdom Malta Macau - HEKIHI Portugal Jordan Bahrain SaintKittsandNevis Malaysia Spain urn I I Canada alnd ZewZa urn~~~~~~e -tal tay u-I aFrance urn Israel - ---- ur urn ;iii liii U ~~E Sweden urn m Vanuatu ' Czech Republic Denmark Thailand * Kuwait _________________ _________________ _____ _____ ll Indonesia Greece KoreaS. Chile Mauritius SaudiArabia ____Philippines Africa __________South Morocco Cyprus E_ ::: - JJamaica Slovenia -Un~~Uited States66% rOOman ElSalvador Estonia Argentina Tonga Bolivia 1;11 India Gambia :-:- sPeru Nepal - Mexico Botswana Nigeria Guatemala ~ Romania ~ Moldova M Ghana - Rwanda -Russia - Tajikistan EVenezuela Islands * TurksandCaicos 0 100% 200% 300% 400% 500% 600% 51 Figure 3 Germany Percent of Deposits Accounted for by 5 Largest Banks Saint KittsandNevis [Luxembr JaDanGuatemala Austria Lebanon Gibraltar india Philippines KKrea S. _ _ _ ___ _ _ _ Guernsey A gna _____________________________________________Indonesia Nepal ...!Lesotho Pdan _________________ania Chile -. _________________Ion ania s v Venezuela ;~~~~~~~~~~~~~~ ladesh .... ________________Swi___Sitsnteland ________________________ _________,_____ Carnbodia ---- ~~~~~~~~~~~~~~~~~~~~s -udeli Arabia - reece Fran,en ______________________________________________________Bahrain _____________Ausk~~~~~~~~~~~~~~~Ausraia . ~_i_ _ _ __ _ _ _ : _ _ _ _ - _ _ _ __ _ _ _ ;;; : . _ _ _ _ _ _ _ _ _ _ _ --; -;= _ _ ZeMaland El Salvador s~~~~~~~~~~~~China BolMaMaN Jordan ~ ~ ~ ~ uni -O inidad and TobaIn Ghanada ~~~~~~~~~~~~~~~~Denmark 2Ru0Ia 80% Israel = Cwr u s~~~~~~~~~~~~~~Beau UthuanI UMechtie'nstein - D~~~~~~~~~~~~~~~~~~~~~~~~~~urundi AJrubaEstonia ~~~~~~~~~~~~~~~~~~~~~~~~~ andCaicos Islands ; Solomon Islands _________________________________________________________Samoa (Westemn) Rwanda Gamibia Bctswana Bhutan 0 20% 40% 60% 80% 100% 52 Figure 4 Percent of Total Bank Assets Government Owned I Macedonia * Honduras : Japan * Macau - aotswana - reru _ Hungary iCj'Drus _ ahrain _Liechtenstein _Austria Venezuela TurksandCaicos Islands Luxembourg Netherlands ElSalvador Moldova Taiikistan Guatemala Vanuatu Solomon Islands Panama Chile Philippines -Nige________ Nigeria Greece -D______________ Tinidadand Tobago Switzerland Cambodia ~~~~~~Italy - 6uyana Czech Republic _______________et Kits andNevis ::~~ ~~~ :::::::: NoFinlan Znambia Morocco ~~~~~~~~Korea S. t Tiailand Turkey35% Croatia Ghana Slovenia Germany ___Taiwan : lQatar P oland . ___ ___ ___ __ ___ ___ __ ___ ___ ______ ___ ___ ___ ___ ___ ___ ___ ___ ___ __ Lithuania IndFo ies ,~~ ~~~- Malawi Rwanda Lesotho Brazil , Sr Lanka Jamaica Burundi Iceland ii iii iE min, Eleeptr, i Russia Bangladesh Romania 0 I I 20% 40% U * nuIndia I 60% Maldives 80% Percent of total bank assets government owned = 0 for:Aruba, Australia, Bolivia, British Virgin Islands, Canada, Cayman Islands, Denmark, Estonia, France, Gambia, Gibraltar, Guernsey, Jordan, Kuwait, Lebanon, Malaysia, Malta, Mauritius, New Zealand, Oman, Puerto Rico, Samoa (Western), Saudi Arabia, Seychelles, South Africa, Spain, Sweden, Tonga, United Kingdom, United States 53 Figure 5 * Liechtenstein * Wionduras = Percent of Total Bank Assets Foreign Owned ondwea, selarus Germany =Wb'gtates Guatemala South Africa rnanWI ISaaesh = Croatia = O,denagaa inThnidadand Tobago Romania Baelland Cyprus uissia SW1pain Wortugal _% ESalvador , _ niiiovies _Guy__________Guyana ~f--i#~ zlr'Walqia Morocco HnutWanuatu Maldives M1auritius m u=%9 cn epublic - - ,,, ,, Lebann Xhrn R EIP E L ~~~~Rico Moldova m m u~~~~~~n Bolivia mmmi~~~~~~~~~~~~~~i -damu,am Lesotho E1 Ghana 62%. §an in(itts andNevis milErTurkey __ __ _ _I__ _Hungary - n i .. in - ~~~~~~~~~~~~~~~am ~bia Em Aruba _ _____'ks __f' andCaieos Islands boomoIIIs,an s Macedo niia ________ ________ ________ ________ ______________________-___ _, CaymanIslands -___N Nw Zealand ___________. _______________-------______________-----____ inning 0 20% I I 40% 60% 80% iGibraltar m U rt~~~~~~~~~~~~~~~~~~~dish VirginIslands 100% Percent of total bank assets foreign owned = 0 for:Burundi,Iceland,India, S. Korea,Kuwait,Nigeria, Seychelles 54 Figure 6 Overall BankActivities &Ownership Restridctiveness ub.New Zeaan Austia, Germany, Switzerland, UnitedKingdQrn France, Luxembug Netherland, 7Australia, Cyprus, Czech Repblic, Denmark, EslDnia, Guernsey, Jroand, Lalvi Nep PanaftPeru, Russia, Seychelles, Singapore, SbuithAfrica ! [ Botswana, Brazil, Gibraltar, India fItaly, Kenya, Kuwait, Malaysia, ~~~~~~~Maldliv Malta, Poand, Tonga, Venezuela| Belarus, Brfflsh Virgin Islands, Egypt, El:Sah-ddo: Guatemlala, Israel, Jewa,SMacedong M:alawil Mauritus, Morocco, Omn,Roman a;IRWAOla, SLIX11fit and1slevis,'Solomnoillslands, Zambia 0 1 2 3 4 Note:The higherthe valuethe higherthe restrictiveness. 55 Figure7 ProfessionalSupervisorsper Bank Maldives Cayman Islands * nitedStates uuwernsey * Finland ' s aCaicos Islands * Ireland - Turkey omtolomo Islands sIn isad Nsis = =ectenstein _ spain Ne Zealand M Macedonia =nlhngdomn = BfLObium _ imu,nia Croatia Venezuela _ anuatu - Saffiov (Westem) Rwanda amb _ = ua = taay Aruba =M9dOVjt Jgmaca Qreece - Bahrain -Guvana inZamZmbia Ranania Lesodho gzehRepublic -Agenbna LMhnnm Oman undbus Chile * ruer@R~~~~~ico BribshVirginIslands andTobago - - EC,ahraljar ,u,,di Arabia :: ________________-~~~~ 9atadesh Botswana Thailands Taiwan 0 5 10 15 20 Numberof supervisorsper bank 56 Figure 8 Percent 10 Biggest Banks Rated by International Agencies Argentna Ausbtalia Botswana Brazil BritshVirginislands . Canada China Finland Germany Indonesia Japan KoreaS. Kuwait Lebanon Malaysia NewZealanai Oman Portugal Romania SaudiArabia Spain (Chiria} Taiwan UnitedKingdom StateUnited El Salvador Thailand Austria Poland Egypt Luxembourg __Sovenia SouthAfrica Turkey Philippines Belgium Chile Greece50% Israel Peru Denmark Uthuania Macau Moroco Sweden Switzerland Venezuela Estonia Aruba Bearus Malta Netherlands Cyprus Boliia Croatia Liechtenstein Mauribus 0 20% 40% 60% 80% 100% Percent 10 Biggest Banks Rated by International Agencies = 0 for: Bahrain, Bangladesh, Bhutan, Burundi, Cambodia, Gambia, Ghana, Guatemala, Guyana, Ireland, Jamaica, Kenya, Lesotho, Malawi, Maldives, Moldova, Nepal, Nigeria, Solomon Islands, Zambia 57 Figure 9 Minimum Capital-to-Asset Ratio Requirement SaintKittsand Nevis Lesotho Puerto Riao 't;hana __________ _________ __________ Ken _________ bia ____ and Tobago nidaYd aVwan _ ___ _ _ _ _ _ _ _ _ _ ~an _ _~~~~~~b a a Afica ania nama _ igena I d mDnia nand . resece flam a _____ ____ ____ ____ _________ _____ ____ ____ _____ ___zech_ El S itco #Mela aco sad Republic Sa hsVianIslands _ _ __ _ _ _ _ _ _ _ _ _ '~~~~~~~~~~~srrlaesh _ usma 0 %il2n6 asraEl | :: J~ a~~~~~~~~~~~~~~~~~~lmwaca ___________________________________~~~~~~~~~~~~~~~~~~~~~~~435tenssey _ _ _ _ _ _ _ _ _ _ _ _ _~~~~~~~~~~~Eaas 10°b n~~~~~~~~ ~ Arge! ~ ~ 0 4% i 8% . ladszi ~ ~ sao (Wstrn ~~~~~~~~~~~~~~~~~~~~~~~~~~12% 16% 'uns9Re~~~~~~~~~~~~~~~~~~~~~~~5 Figure 10 Actual Risk-Adjusted Capital Ratio Indonesia Puerto Rico Jamaica ______B -E _ a N t BaMadesh a~~~~~Litr eal ep________ ramlDl Arnba ________________________ Israel KoreaS. Iceland 3 sh VirginIslands Egypt m aiw,an(China) |~~~~~~ ________ _______ _____ Zealand n Czech Republic - : P~anm an Thaleertands El I .~~~~ nada Germany * _ in - dminmna *- * - UU- in - U 11.6 *--U -UnFinland in ~~~Dermark ~~~~~~~i z,eand ---UKenya a ~~~~~~Turkey Honduras ~~~~~~~~~~United States - Thailand -Tajikistan ana Q _____________~~Mossc Austria ynezu,ela - 9we~~~~~~~~~~~Soinia rsiabi z itdaad andTobago Si *~~~~~~~~~~~~A Xdie e uersa Brazil~ -~~~~~~~~~~~~~~~~~~ad - ~ ~~~ai Sa~~~~aW Arabia ~~ uectenme ~ ~ ~ ~ ~ -stonia - w~~~~~~~~~~~~~~~~II _ _ _I 0 10 E 20 0Toa Soro Islands _ Cammbia _ 30 40 Ratio 59 Figure 11 Overall Capital Stringency Aruba, Bahrain, Bhutan,, Bangladesh, China, Cyprus, Czech Republic, ElSalvador, Malaysia, Romania, TurkandCaicos Sweden, Islands, Vanuatu Gm*GwaVZ canakCraft ~~ GA~Gwiemi P* HmWiw nay sal tlJpn Cayman Isunlads, Botswavyna Botswana, Cayman Islands, Hungary, Israel, Italy,Japan, Lebanon, Macedonia, Malta, Mauritius, Morocco, Nepal, St. Puerto Rico, Russia, Poland, Portugal, NewZealand, KittsandNevis, Singapore, Switzerland, Trinidad and Tobago, United States, Zambia SP.a;.,l MO' B.... .. Spin r.. Arge*WAustai, Belgium, Denmark, Qatar, United Kingdom 0 1 2 3 4 5 6 7 Note: The higher the value the more prompt is corrective action 60 - Vanuatu _____ _d Figure 12 Capital Regulation Index CaicOS Islands EeVRe°ublkc sVirgin Islands s8ok8on Islands Mlyia yes Lala pras Bhutan Weffinanand Bandadesh ______m Islands _ atvia aa~~~~~~~d Eh ai Snaimala ~ -~~~~ = ~ an Autn ia ambia ~ ~~~ !kV^,,Oalm ~ -~~~ - N3elanl -n - I 0 2 4 en Vietnam asUnited Kngdom ' 90vaAustralia 6 8 10 Note: The higher the value the greater the stringency 61 sSingapre = Sut Afca- Figure 13 Official Supervisory Power TurksandCaicosIslands !jj mY~TrinidadandTobago Nue~~~~Pe o Rico y- Canad Raintladsand Nevis Israe Gu iemala =T a i w ;rance n~~~~~~~~~~* aia a * . Romania *INew Zealand Finland Burundi mj«onlIsands rgen_naChina Nanmibia mu _ _ _ _ _ _ .M _ _ _ _ _ _ _ _ _ _ :alawsp _ Quyana~~~~~ oMdaw ..Taikis tan *RGhana e ______________eoia _st e int tb _________________________________ _ m o_ Iester) _ _ ____ _ _ _ _I_ _ _L _ L b 6am Maldirs enba__ on _ Gambia Sh Jamic Republic ~~~Oa n tiaBhuta m m i" Be u Venezuela mm.. .. ~~~~~m ~ m. ~ ~ ~ ~ mm..~~~~~~~~~~~~~~~~~~~~~~~~Pr Noe h ihe m m h au ~ ~~ovni ~~~~~~~~~~~~~~~~~~~~~~Vanuatu lrnnt tas1 RuCsZWia~ * th graerte po ~ ~~~a er rrzt u.tWan m - Omnan mu.~~~~~~~~~~~~~~~~~~~~~~~~~ev - a. - o m .. mm 2 m um u um 4 6 8 10 12 .i 14 ; arain .inSl venia Hungary 16 18 Note: The higher the value the greater the power 62 Figure 14 Prompt Corrective Action Canada, Cayman Bolivia, British VirginIslands, Australia, Bangladesh, Belarus, Bhutan, Argentina, Aruba, Guyana, Germany, Gibraltar, Greece, Guemsey, ElSalvador, Finland, France, Gambia, Islands, China, Cyprus, Maldives, Morocco, Nepal, Latvia, Luxembourg, Macau, Malawi, India,Ireland, Israel, Italy,Jamaica, Saudi Arabia, Rico,Romania, St KittsandNevis, Panama, Poland, Portugal, Puerto Netherlands, NewZealand, Sweden, Switzerland, Thailand, Tonga, Trinidad and Singapore, Solomon Islands, South Afnca, SnLanka, Tobago, Turkey, TurksandCaicos Islands, United Kingdom, Vanuatu, Vietnam, Zambia Maayia,$nlmbila, Russia 0 0010, d;Xtt~~~~~~~~~~~~~~~~R1 S.Korea, Maurtus, Peru Crata,Ghana, Japan, Kenya, Austria, Bahrair, Botswana, Brazil,, Egypt, Hungary, Indonesia, Oman, Philippines, Qatar, Samoa,(Western), Slovenia Lebanton, Maoedonia, 0 1 2 3 4 5 6 7 Note: The higher the value the more prompt is corrective action 63 Figure 15 Restructuring Power Belarus, Finland, Jordan, Mauritius, South Africa, TurksandCaicos Islands Frac, Denmak, Canada BtitshV1Wgnb G lads, Eg, Esn Gemany, Guernsey, ~ doiea ht*a s4 v,MeI St. *t aidNevis,wd, Tonigs -~uiddad Mdldova, Nepal, ZamDsbia W ~~~~~~~Tcbgo Argentna, Aruba, Australia, Austia,Bahrain, Bangladesh, Belgium, Bhutan, Bolivia, Botswana, Brazil, Burundi, Cambodia, Chile, China, Cyprus, Czech Republic, ElSalvador, Gambia, Ghana, Gibraltar, Greece, Guatemnala, Honduras, Hungary, Ireland, Jamaica, Japan, Kenya, S.Korea, Kuwait, Lebanon, Lesotho, Liechtenstein, Lithuania, Luxenbourg, Macau, Macedonia, Malaysia, Maldives, Malta, Mexdco, Morocco, Namibia, Netherlands, NewZealand, Nigeria, Onan,Panama, Peru,Philippines, Poland, Puerto Rico Qatar, Romania, Russia, Rwanda, Samoa (Westemn), Saudi Arabia, Sovenia, Soloronislands, Spain, Sri Lanka, Switzerand, Taiwan (China), Tajikistan, Thafand, Turkey, United KLngdom, UnNted States, Vanuatu, Venezuela, Vietnman 0 1 2 3 Note:The higherthe valuethe morepromptis the power 64 Figure 16 Declaring Insolvent Power Bangladesh, Cayman Islands, France, Guemsey, India, Kuwait, Lebanon, Macau, Moldova, Nepal, Sweden, Trinidad andTobago Australia, Austria, Belum,Canada, China, Egypt,Estonia, Ghana, Guate a, Irland, Italy,Latva,LiUechte Luxeborg, Maldives, Netherlands, NewZeal Russia, South Afic,SpaSn, SWizdland, T l* (China), Turksand Cak Islands, Uned indM Argentina, Aruba, Bahrain, Belarus, Bhutan, Bolivia, Botswana, Brazil, Burundi, Cambodia, Chile, Croatia, Cyprus, Czech Republic, Denmark, ElSalvador, Finland, Gambia, Germany, Gibraltar, Greece, Guyana, Honduras, Hungary, Indonesia, Israel, Jamaica, Japan, Jordan, Kenya, S.Korea, Lesotho, Lithuania, Macedonia, Malawi, Malaysia, Malta, Mauritius, Mexico, Morocco, Namibia, Nigera,Onman, Panama, Peru,Philippines, Poland, Portugal, Puerto Rico,Qatar, Romania, Rwanda, St.KlftsandNevis, Samoa (Wester), SaudiArabia, Slovenia, Solomon Islands, Sri Lanka, Tajikistan, Thailand, Tong4o Turkey, United States, Vanuatu, Venezuela, Zambia I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 0 1 2 Note: The higher the value the greater the power 65 Figure 17 SupervisoryForbearance Discretion Burundi, Chile, Czech Republic, Denmark, Egypt, Guatemala, Honduras, Jordan, Macedonia, Malaysia, Macedonia, Moldova, Venezuela Austria, Bahrain, Bolivia, Botswana, Brazil, Cambodia, Croatia, Estonia, Finland, Ghana, Gibraltar, Hungary, Latvia, Indonesia, Japan, Kenya, S.Korea, Kuwait, Lebanon, Lesotho, Liechtenstein, Malta, Mauritus, Namibia, Nigeria, Oman, Peru,Philippines, Mexico, Qatar, Russia, Rwanda, Samoa (Westem), Slovenia, Spain, Taiwan (China), Tajikistan, TurksandCaicos United States Islands, Belarus, British VirginIslands, Cayman Islands, China, Cyprus, ElSalvador, Greee,Guyana, Israet, 7tly,Jamaica, 7ithuania, Luxembourg, Macau, Malawi, Makdles, Morocco, Nepal, Nethewiands, Portugal, Puerto Rico,Romania, St Kitts andNevis, SaudiArabia, Singapore, Si Lanka, $weden, Switzerfand, Thailand, TongaTrinidad andTobago, Vanuatu, Zambia Turkey, Argentina, Aruba, Australia, Bangladesh, Canada, France, Germany, Guemsey, Islands, South Afies, NewZealand, Panama, Polartd, Sohomon India,Ireland, United Kingdom Belgium, Bhutan, Gambia 0 1 2 3 4 Note: The higher the value the greater the discretion 66 Figure 18 Solomon m Islands Supervisor Tenure _ Kenya Guemsey Australia _ n NTNanib.a T jiEstan Moldova Cayan Islands Nepai lEstonia ElSalvador Croatia Cambodia Venezuela Vanuatu TurksandCaicos Islands _outhAfrica SeyTchelles Madives VirginIslands _ A~~~ru a Latvia Burundi Rwanda Lebanon Indonesia =Briidsh Guyana Ghana _________ ____Hungary 30tswana 3hutan _________ ____ ____ ____ elariusd __ ?desh hralll _ au~~~~nbus Slovenia _______~~~~~L?,dthod _ Irel~~rand bourg _a~ ~ Lithuania Liechtenstein __________Bolivia _ SM~~~~.aamtoa (Western) iMalta ____________Argentina ____________________ Denmark 6.4 Netherlands NewZealand _ UnitedStates SaintKittsandNevis _a ___ __ ___ ___ __________ ___ __Luxem M acau _____ Kuwait e___________________i Saudi Arabia Gambia P- and : zambia TrnidadandTobago Thailand Panama Jamaica Germany Portugal Honduras Oman _________________~~~~~~eru ____________ ____ ........ ____ ____ ____ ~M G§reUece Taiwan -- - Guatemala - ibratar - Finland j__________________________________ jj jjBrazil _ KoreaS. 0 5 10 15 Malawi 20 __Ej--ytjjPhilippines 25 Ylgrs 67 Figure 19 Likehood SupervisorMoves into Banking Czech Republic, Ghana, Japan, Macedonia, Samoa (Western), Seychelles Bahrain, Bangladesh, Bhutan, British Virgin Islands, Gambia, Gibraltar, Greece, Guyana, Icekand, India, Jamaica, Jordan, Kenya, S. Korea, Latvia, Lebanon, Macau, Mauitius, Mexico, Oman, Poland, St KittsandNevis, Tajwsan, Turks andCaicos Istands, United States, Vanuatu, Vietnam, Zambia Austia, Belarus, Belgium, Botswana, 8razi,Sundi,Camoda Canada, Cypus, Denmak, EgyptEstxaFinland, Gemany, Guatemala, Indonesia, Israel,aly, Lesoto, ULc h , Lu mbg, Malawi, Malsia,Morocco, Nep Ntherlands, Nw Zealad, NIea, Panama, Portugal, PuertRico, Rwara,Saudiabia, Nia Solomon IsandsSpain, SfiLanka, Sweden, Taiwan (China, Thailand, Trlndad andTobgo, Turkey Argentina, Aruba, Australia, Bolivia, Cayman Islands, Chile, China, Croatia, ElSalvador, Honduras, Hungary, Ireland, Kuwait, Lithuania, Moldova, Namibia, Peru, Philipines, Romnania, Russia, Singapore, South Afica,United Kingdom, Venezuela 0 1 2 3 Note: The higher the value the greater the likelihood 68 Figure 20 Private Monitoring Index Bangladesh, Nepal, Rwanda Kenya, Lata, Solomon Islands, Vietnam British VirginIslands, Cyprus, Czech Republic, Germany, Guatemala, Iceland, Lesotho, Malawi, Maldives, Russia Autia, elium, **an Fmi: 0 l * Slovenia, Swe#den, Thai7Wd, Tonga Tnid:adzlTrky0 :TurlX a7nd>i;s1 Greece, _ Aruba,Bolivia,Canada, Caymffan fIslands, China,Croatia, Denmark, Estonia, Gibraltar, Honduras, Jordan,Liechtenstein, Macau,Mauritius, New Zealand,Poland,Sit.KittsandNevis,Taiikistan, Vanuatu A4rgentmna, Bahrain, Botswana, Brazil,Burunldi, Chite,Eg7ypt7 ElSalvzador, Guem.sey, Guyana, Indoneia,Jlapan,Narmibia, Ofman, Pasnama, Peru,Philippines,Portugal, Oatar, Samoa(tWestem), Souh Atfica,Spain,Switzerland7 United.4ingdom, United7States, Zambia Finland,Israel,Lebanon, Malaysia, Mafta,Singapore, SriLanka, Taiwan(China) 0 2 4 6 8 10 Note: Tehigher the value the greater private monitoring 69 Figure 21 Percent of Entry Applications Denied Bhutan Egypt Maldives Solomon Islands Thailand Gambia Kenya Bangladesh Ghana TurksandCaicos Islands _ Cambodia Macau IIIIIIIndonesia Lithuania India Romania Philippines _Bahrain Botswana 33% inBunundi nHungary Moldova Guatemala Malawi South Africa Italy Guyana 11111111Trinidad andTobago Nepal : ElSalvador Honduras Tajikistan Canada Venezuela Liechtenstein _IIIIIIenmark _IIIISweden _Austria _Taiwan _ Panama I United States 0 20% 40% 60% 80% 100% No denial of entry applicants:Argentina,Belarus,Belgium,Bolivia,BritishVirgin Islands,Cyprus,Estonia, Finland,Germany,Greece,Guernsey,Ireland,Japan,Latvia,Lebanon,Lesotho,Luxembourg,Malta,Morocco, Netherlands,New Zealand,Nigeria, Oman,Peru,Poland,Portugal,PuertoRico, Qatar,Rwanda, Slovenia,Spain, Switzerland,Tongo 70 Figure22 Percentof DomesticEntryApplicationsDenied Bhutan Thailand Kenya Samoa (Westem) Bangladesh Ghana TurksandCaicos Islands Cambodia Lithuania Namibia Moldova India Bahrain Hungary Trinidad andTobago Romania CzechRepublic35.7% Guyana South Africa Taiwan Guatemala Italy China Denmark Nepal Honduras Talikistan Sweden I Cayman Islands I UnitedStates 0 20% 40% 60% 80% 100% No denial of domestic entry applicants: Argentina, Australia, Austria, Belarus, Botswana, British Virgin Islands, Burundi, Canada, Cyprus, El Salvador, Estonia, Finland, France, Gambia, Germany, Greece, Japan, Latvia, Lesotho, Liechtenstein, Macau, Malawi, Morocco, Netherlands, Nigeria, Oman, Panama, Peru, Philippines, Poland, Portugal, Puerto Rico, Qatar, Rwanda, Spain, Switzerland, Venezuela 71 Figure 23 Percent of Foreign Entry Applications Denied Burundi Egypt Gambia Maldives Solomon Islands Tajikistan Macau TurksandCaicos Islands Cambodia Ghana Indonesia Botswana Philippines Bangladesh ElSalvador Malawi Venezuela India Romania Austria South Africa16.7% Canada Liechtenstein Panama 0 20% 40% 60% 80% 100% No denial of foreign entry applicants: Argentina, Australia, Bahrain, Belgium, Bolivia, British Virgin Islands, Cayman Islands, Cyprus, Denmark, Germany, Greece, Guernsey, Guyana, Hungary, Ireland, Italy, Japan, Latvia, Lebanon, Lithuania, Luxembourg, Malta, Moldova, Netherlands, New Zealand, Nigeria, Peru, Poland, Portugal, Puerto Rico, Rwanda, Saudi Arabia, Slovenia, Spain, Sweden, Switzerland, Taiwan (China), Tongo, Trinidad & Tobago, United States, Zambia 72 Appendix Information 1 on Selected Other Variables World BankSurveyQuestions in the Database Standard Minimum Maximum value Median deviation value Number Number Numberof countriesproviding answering answering Mean information yes no__ _ 1.2How many banksare thereat present? 1.4Is it legallyrequiredthat applicantsfor bankinglicensessubmitinformationon the sourceof fundsto be used as capital? 1.5.1Arelaw enforcementauthoritiesconsultedduring theverificationof the sourcesof funds to be used as bank capital? 1.11.1 Is theamount or quality of capitalamongthe primaryreasonsfor denial of applicationsfor bankinglicenses? 1.11.2Are bankingskills amongthe primaryreasonsfor denial of applicationsfor bankinglicenses? 1.11.3Is reputationamongthe primaryreasonsfor denialof applicationsfor bankinglicenses? 1.11.4Is an incompleteapplicationamongtheprimary reasonsfor denialof applicationsfor banking licenses? 2.2 Canrelatedparties owncapital in a bank? and/or 2.4 Whatfractionof capital in the largest 10banks is ownedby commercial/industrial financialconglomerates? 2.5 Can non-bankfinancialfirns (e.g. insurancecompanies,financialcompanies,etc.)own commercialbanks? 3.2 Doesthe minimumcapital-assetratio varyas a functionof an individualbank'scredit risk? 3.5Is subordinateddebt allowable(required)as part of capital? 5.1Is an extemal audita compulsoryobligationfor banks? 5.2Are specificrequirementsfor the extentor natureof the auditspelled out? 5.3Are auditorslicensedor certified? 5.4Dosupervisorsgetcoiesofbankextemalauditorreports? 5.8Has legal action beentaken by supervisorsagainstan externalbank auditor in the last 5 years? 6.2 Havesupervisoryauthoritiesforcedbanks to changetheir internalorganizationalstructurein the ast 5 years? 7.4 Doliquidityreserves(or reservesdepositedat the centralbank) eam any interest? 8.1.4Is there a per person limiton depositinsurance? 8.1.5Does the depositinsuranceauthoritymakethe decisionto intervenein a bank? 8.1.7Does the deposit insuranceauthorityhavethe legalpowerto deal with (intervene/ takeover)a troubled(thoughperhapsstill solvent)bank to reducethe ultimateburden on thedeposit insurance fund? 8.2Asa shareof total assets, what is the value of largedenominateddebt liabilitiesof bankssubordinateddebt,bonds, etc.-thataredefinitelynot coveredby any explicitor implicitsavings I_I_I__ protectionsscheme? 8.3 Aspart of failureresolution,howmanybanks closedor mergedin the last 5 years? 8.4Weredepositorswhollycompensated(to the extent of legal protection)the last time a bank 107 105 N/A 21 N/A 84 219.19 0.80 101 57 44 0.56 8.7 Hasthe deposit insuranceagency/fundever takenlegal action against bankdirectorsor other bankofficials? ?16 ofa 'ison-pertormingloan7" 9.1 i, Uterea iOliiidi clinitWiuii 9.6If a customer has multiple loansand one loan is classifiedas non-performing,are the other loans automatically classifiedas non-performing? 10.1Does accrued,though unpaid,interest/ principalenterthe incomestatementwhilethe loan is stillperforming? 1_ 37 37_0_30______0_46 failed? .... _I_ _ _ _ _ _ _ __ _ _ _ _ _ 24.00 1.00 1,067.52 0.40 2.00 0.00 10,500.00 1.00 1.00 0.50 0.00 1.00 1.00 0.49 0.00 1.00 I I 53 33 20 0.62 I I 52 52 52 34 37 26 18 15 26 0.65 0.71 0.50 1.00 1.00 0.50 0.48 0.46 0.50 0.00 0.00 0.00 1.00 1.00 1.00 106 55 99 N/A 7 N/A 0.93 0.36 1.00 0.20 0.25 0.36 0.00 0.00 1.00 1.00 107 100 7 0.93 1.00 0.25 0.00 1.00 108 106 107 106 107 107 55 76 28 92 104 69 101 104 14 40 77 14 3 37 6 3 41 36 0.37 0.87 0.97 0.68 0.94 0.97 0.25 0.53 0.00 1.00 1.00 1.00 1.00 1.00 0.00 1.00 0.44 0.34 0.17 0.48 0.23 0.17 0.44 0.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 71 57 58 30 47 14 41 10 44 0.42 0.82 0.24 0.00 1.00 0.00 0.50 0.38 0.43 0.00 0.00 0.00 1.00 100 1.00 14 10 4 0.71 1.00 0.47 0.00 1.00 33 N/A N/A 0.28 0.25 0.26 0.00 0.87 85 53 N/A 41 N/A 12 6.24 0.77 1.00 1.00 14.01 0.42 0.00 0.00 80.00 1.00 26 0.30 0.00 0.46 0.00 1.00 . I_ 7i 3n ;67 102 37 65 0.36 105 92 13 0.88 t i 00 i4 _0.4,____U 0.00 0.48 0.00 1.00 100 0.33 0.00 1 00 _ 73 Appendix 1 Information on Selected Other Variables in the Database Number Number Numberof countriesproviding answering answering Mean information yes no World BankSurveyQuestions 10.1.1Does accrued,though unpaid,interest/ principalenterthe incomestatement whilethe loan is 103 14 89 0.14 Median 0.00 Standard Minimum Maximum value deviation value 0.34 0.00 1.00 _ still non-performing? 10.2Afterhow manydays in arrearsmust interestincomeaccrualcease? 10.3Are financialinstitutionsrequiredto produceconsolidatedaccountscoveringall bank and non- 78 104 N/A 87 N/A 17 100.77 0.84 90.00 1.00 67.44 0.37 1.00 0.00 365.00 1.00 103 103 104 96 101 70 70 68 72 29 94 33 10 47 39 33 31 74 10 63 91 23 31 35 0.70 0.28 0.90 0.34 0.10 0.67 0.56 0.49 1.00 0.00 1.00 0.00 0.00 1.00 1.00 0.00 0.46 0.46 0.30 0.48 0.33 0.47 0.50 0.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 98 49 49 0.50 0.50 0.50 0.00 1.00 98 102 93 16 N/A 6 82 N/A 87 0.16 16.58 0.06 0.00 1.00 0.00 0.37 116.24 0.25 0.00 0.00 0.00 1.00 1,172.00 1.00 100 N/A N/A 15540 42 50 363 62 0.00 3,200.00 bank financial subsidiaries? 10.4.1Are off-balancesheet itemsdisclosedto the public? 10.5Must banks disclosetheir risk managemntproceduresto the public? 10.6Arebank directorslegallyliableif informationdisclosedis erroneousor misleading? 10.6.1Have penaltiesbeen enforced? 10.7Do regulationsrequire creditratingsfor commercialbanks? 10.7.3.1Are bondsrated? 10.7.3.2Is commercialpaperrated? 10.7.3.3Are otheractivitiesrated(e.g. bank certificatesof deposit,pensionand mutual funds, insurance companies, financial guarantees, etc.)? 11.4Havesupervisoryagenciessuspendeddirectors'decisionsto distributedividends,bonusesor management fees in the last 5 years? 11.9.5Can supervisoryautihoritiesinsure liabilitiesbeyond any explicitdepositinsurancescheme? 11.10Howmany bankshave beenclosed in the last five years? 12.3Arethere importantdifferencesbetween whatthe supervisoryagency is expected to do and . _ what is mandated by the law? 12.4How manyprofessionalbanksupervisorsare there in total? 74 Appendix 2. Guide to Database on Bank Regulation and Supervision I.Entry into Banking 1.1 What body/agencygrants commercialbankinglicenses? 1.2 Howmany commercialbanksare there at present? 1.3 What are the minimumcapital entryrequirements(in U.S. $ and/or domesticcurrency)? 1.4 Is it legallyrequiredthat applicantssubmitinformationon the sourceof fundsto be used as capital" 1.5 Arethe sourcesof fundsto be used as capital verifiedbythe regulatory/supervisoryauthorities? 1.5.1 Are law enforcementauthoritiesconsultedin this process? 1.6 Can the initialdisbursementor subsequentinjectionsof capitalbe done withassets other than cash or governmentsecurities? 1.7 Can initial disbursementof capital be done withborrowedfunds? 1.8 Which of the followingare legallyrequiredto be submittedbefore issuanceof the bankinglicense? 1.8.1 Draft by-laws? 1.8.2 Intendedorganizationchart? 1.8.3 Financialprojectionsfor first threeyears? 1.8.4 Financialinformationon mainpotentialshareholders? 1.8.5 Background/experience of futuredirectors? 1.8.6 Background/experience of futuremanagers? 1.8.7 Sourcesof fundsto be disbursedin the capitalizationof new bank? 1.8.8 Marketdifferentiationintendedfor the new bank? 1.9 In the past five years, how manyapplicationsfor commercialbankinglicenseshave beenreceived from domesticentities? 1.9.1 How many of those applicationshave been denied? 1.10 In the past five years, how manyapplicationsfor commercialbankinglicenseshave beenreceived from foreignentities? 1.10.1 How many of thoseapplicationshave been denied? 1.11 What were the primary reasonsfor denial of the applicationsin 1.9.1and 1.10.1? 1.11.1 Capital amountorquality? 1.11.2 Bankingskills? 1.11.3 Reputation? 1.11.4 Incompleteapplication? 2. Ownership 2.1 Is there a maximumpercentageof bank capitalthat can be owned by a singleowner? 2.1.1 If yes,what is the percentage? 2.2 Can relatedparties own capital in a bank? 2.2.1 If yes, what are the maximumpercentagesassociatedwiththe total ownershipby a related party group(e.g., family,businessassociates,etc.)? 2.3 What is the level of regulatoryrestrictivenessof ownershipby nonfinancialfirms of banks? Unrestricted- A nonfinancialfirm may own 100percentof the equity in a bank. Permitted- Unrestrictedwith prior authorizationor approval. Restricted- Limitsare placedon ownership,such as a maximumpercentageof a bank's capitalor shares. Prohibited-No equityinvestmentin a bank. 2.4 What fractionof capital in the largest 10banks is owned.bycommercial/industrialand/or financial conglomerates? 2.5 Can non-bankfinancialfirms (e.g.insurancecompanies,financecompanies,etc.) own commercial banks? 2.5.1 What are the limits? 2.6 Of deposit-takinginstitutionsin your country,what fractionof depositsis held by the five (5) largest, banks? 3. Capital 75 3.1 What is the minimum capital-asset ratio requirement? 3.1.1 Is this ratio risk weighted in line with the Basle guidelines? 3.2 Does the minimum ratio vary as a function of an individual bank's credit risk? 3.3 Does the minimum ratio vary as a function of market risk? 3.4 What is the actual risk-adjusted capital ratio in banks today (latest available data)? 3.5 Is subordinated debt allowable (required) as part of capital? 3.6 What fraction of revaluation gains is allowed as part of capital? 3.7 What fraction of the banking system's assets is in banks that are 50% or more government owned? 3.8 What fraction of the banking system's assets is in banks that are 50% or more foreign owned? 3.9 Before minimum capital adequacy is determined, which of the following are deducted from the book value of capital? 3.9.1 Market value of loan losses not realized in accounting books? 3.9.2 Unrealized losses in securities portfolios? 3.9.3 Unrealized foreign exchange losses? 4. Activities 4.1 What is the level of regulatory restrictiveness for bank participation in securities activities ( the ability of banks to engage in the business of securities underwriting, brokering, dealing, and all aspects of the mutual fund industry) ? Unrestricted - A full range of activities in the given category can be conducted directly in the bank. Permitted - A full range of activities can be conducted, but all or some must be conducted in subsidiaries. Restricted - Less than a fill range of activities can be conducted in the bank or subsidiaries. Prohibited - The activity cannot be conducted in either the bank or subsidiaries. 4.2 What is the level of regulatory restrictiveness for bank participation in insurance activities ( the ability of banks to engage in insurance underwriting and selling) ? Unrestricted - A full range of activities in the given category can be conducted directly in the bank. Permitted - A full range of activities can be conducted, but all or some must be conducted in subsidiaries. Restricted - Less than a full range of activities can be conducted in the bank or subsidiaries. Prohibited - The activity cannot be conducted in either the bank or subsidiaries. 4.3 What is the level of regulatory restrictiveness for bank participation in real estate activities ( the ability of banks to engage in real estate investment, development, and management) ? Unrestricted - A full range of activities in the given category can be conducted directly in the bank. Permitted - A full range of activities can be conducted, but all or some must be conducted in subsidiaries. Restricted - Less than a full range of activities can be conducted in the bank or subsidiaries. Prohibited - The activity cannot be conducted in either the bank or subsidiaries. 4.4 What is the level of regulatory restrictiveness for bank ownership of nonfinancial firms? Unrestricted - A bank may own 100 percent of the equity in any nonfinancial firm. Permitted - A bank may own 100 percent of the equity in a nonfinancial firm, but ownership is limited based on a bank's equity capital. Restricted - A bank can only acquire less than 100 percent of the equity in a nonfinancial firm. Prohibited - A bank may not acquire any equity investment in a nonfinancial firm. 5. External Auditing Requirements 5.1 5.2 5.3 5.4 5.5 Is an external audit a compulsory obligation for banks? Are specific requirements for the extent or nature of the audit spelled out? Are auditors licensed or certified? Do supervisors get a copy of the auditor's report? Does the supervisory agency have the right to meet with external auditors to discuss their report 76 without the approval of the bank? 5.6 Are auditors required by law to communicate directly to the supervisory agency any presumed involvement of bank directors or senior managers in illicit activities, fraud, or insider abuse? 5.7 Can supervisors take legal action against external auditors for negligence? 5.8 Has action been taken against an auditor in the last 5 years? 6. Internal Management/Organizational requirements 6.1 Can the supervisory authority force a bank to change its internal organizational structure? 6.2 Has this power been utilized in the last 5 years? 7. Liquidity & Diversification Requirements 7.1 Are there explicit, verifiable, and quantifiable guidelines regarding asset diversification? 7.2 Are banks prohibited from making loans abroad? 7.3 What are the requirements for bank in terms of liquidity reserves or any reserves whatsoever on deposits at the Central Bank? 7.4 What interest, if any, is paid on these reserves? 7.5 What is the minimum reserve requirment (%)? 7.6 How is the reserve requirement remunerated? 7.7 What domestic and foreign assets satisfy these liquidity reserve or any other reserve requirements? 8. Depositor (Savings) Protection Schemes 8.1 Is there an explicit deposit insurance protection system? If yes: 8.1.1 Is it funded by (check one): the government, the banks, or both ? 8.1.2 What is the ratio of accumulated funds to total bank assets? 8.1.3 What is the deposit insurance limit per account? 8.1.4 Is there a limit per person? 8.1.4.1 If yes, what is that limit (in domestic currency)? 8.1.5 Does the deposit insurance authority make the decision to intervene a bank? 8.1.6 If no, who does? 8.1.7 If yes, does the deposit insurance authority have the legal power to deal with (intervene/takeover) a troubled (though perhaps still solvent) bank to reduce the ultimate burden on the deposit insurance fund? 8.2 As a share of total assets, what is the value of large denominated debt liabilities of bankssubordinated debt, bonds, etc.-that are definitely not covered by any explicit or implicit savings protection scheme? 8.3 As part of failure resolution, how many banks closed or merged in the last 5 years? 8.4 Were depositors wholly compensated (to the extent of legal protection) the last time a bank failed? 8.4.1 On average, how long does it take to pay depositors in full? 8.4.2 What was the longest that depositors had to wait in the last 5 years? 8.5 Were any deposits not explicitly covered by deposit insurance at the time of the failure compensated when the bank failed (excluding funds later paid out in liquidation procedures)? 8.6 Can the deposit insurance agency/fund take legal action against bank directors or other bank officials? 8.7 Has the deposit insurance agency/fund ever taken legal action against bank directors or other bank officials? 9. Provisioning Requirements 9.1 Is there a formal definition of a "non-performing loan" ? 9.1.1 If yes, what is it? Is the number of days in arrears the only or principal basis of asset classification and provisioning? 77 9.2 Classification of loans in arrears based on their quality: after how many days is a loan in arrears classified as: 9.2.1 Sub-standard ? 9.2.2 Doubtful? 9.2.3 Loss? 9.3 What are the minimum required provision as loans become: 9.3.1 Sub-standard? 9.3.2 Doubtful? 9.3.3 Loss? 9.4 If you do not have a loan classification system based on sub-standard, doubtful and loss loans, please describe the type of classification system you do have. 9.5 What is the ratio of non-performing loans to total assets (latest available)? 9.6 If a customer has multiple loans and one loan is classified as non-performing, are the other loans automatically classified as non-performing? 10. Accounting/Information Disclosure Requirements 10.1 Does accrued, though unpaid, interest/principal enter the income statement while the loan is still performing? 10.1.1 Does accrued, though unpaid, interest/principal enter the income statement while the loan is still non-performing? 10.2 After how many days in arrears must interest income accrual cease? 10.3 Are financial institutions required to produce consolidated accounts covering all bank and any nonbank financial subsidiaries? 10.4 Are off-balance sheet items disclosed to supervisors? 10.4.1 Are off-balance sheet items disclosed to the public? 10.5 Must banks disclose their risk management procedures to the public? 10.6 Are bank directors legally liable if information disclosed is erroneous or misleading? 10.6.1 Have penalties been enforced? 10.7 Do regulations require credit ratings for commercial banks? 10.7.1 What percentage of the top ten banks are rated by international credit rating agencies (e.g. Moody's, Standard and Poor)? 10.7.2 What percentage of the top ten banks are rated by domestic credit rating agencies ? 10.7.3 Which bank activities are rated? 10.7.3.1 Bonds? 10.7.3.2 Commercial paper? 10.7.3.3 Other activity (e.g., bank certificates of deposit, pension and mutual funds, insurance companies, financial guarantees, etc.)? 11. Discipline/Problem Institutions/Exit 11.1 Are there any mechanisms of cease and desist-type orders, whose infraction leads to the automatic imposition of civil and penal sanctions on the banks directors and managers? 11.2 Can the supervisory agency order the bank's directors or management to constitute provisions to cover actual or potential losses? 11.3 Can the supervisory agency suspend the directors' decision to distribute: 11.3.1 Dividends? 11.3.2 Bonuses? 11.3.3 Management fees? 11.4 Have any such actions been taken in the last 5 years? 11.5 Which laws address bank insolvency? 11.6 Can the supervisory agency legally declare-such that this declaration supersedes the rights of bank shareholders-that a bank is insolvent? 11.7 Does the Banking Law give authority to the supervisory agency to intervene-that is, suspend some or all ownership rights-a problem bank? 11.8 Does the Law establish pre-determined levels of solvency deterioration which forces automatic actions (like intervention)? 11.9 Regarding bank restructuring and reorganization, can the supervisory agency or any other 78 government agency do the following: 11.9.1 Supersede shareholder rights? 11.9.2 Remove and replace management? 11.9.3 Remove and replace directors? 11.9.4 Forbear certain prudential regulations? 11.9.5 Insure liabilities beyond any explicit deposit insurance scheme? 11.10 How many banks have been closed in the last five years? 11.10.1 What percentage of total bank assets did those banks account for? 12. Supervision 12.1 What body/agency supervises banks? 12.1.1 Is there more than one supervisory body? 12.2 To whom are the supervisory bodies responsible or accountable? 12.2.1 How is the head of the supervisory agency (and other directors) appointed? 12.2.2 How is the head of the supervisory agency (and other directors) removed? 12.3 Are there important differences between what the supervisory agency is expected to do and what is mandated by law? 12.4 How many professional bank supervisors are there in total? 12.4.1 How many professional bank supervisors are there per institution? 12.5 How many onsite examinations per bank were performed in the last five years? 12.6 What is the total budget for supervision in local currency (in 1997 or 1998; please specify which)? 12.7 How frequently are onsite inspections conducted in large and medium size banks ( annually equals I and every two years equals 2) ? 12.8 What is the average tenure of current supervisors (i.e., what is the average number of years current supervisors have been supervisors)? 12.9 How often are bank supervisors employed by the banking industry once they quit their service as bank supervisors? Never, Rarely, Occasionally, or Frequently? 12.10 If an infraction of any prudential regulation is found by a supervisor, must it be reported? 12.11 Are there mandatory actions in these cases? 12.12 Who authorizes exceptions to such actions? 12.13 How many exceptions were granted last year? 12.14 Are supervisors legally liable for their actions (e.g., if a supervisor takes actions against a bank can he/she be sued) ? 79 Appendix 3 Groupings of Countries by Geographical Region, Income Level and Development Status 80 I Appendix 2 Groupings of Countries by Geographical Region, Income Level and Development Status Auterits (22)0 Argentina Aruba Bolivia Brazil British Virgin Islands Canada Cayman Islands Chile El Salvador Guatemala Guyana Honduras Jamaica Mexico Panama Peru Puerto Rico Saint Kitts and Nevis Trinidad & Tobago Turks and Caicos Islands United States Venezuela 0 NrtkMatl Cambodia China Indonesia Japan Korea Macau Malaysia New Zealand Philippines Samoa(Westem) Singapore SolomonIslands Taiwan (China) Thailand Tonga Vanuatu Vietnam Austalia Austria Belarus Belgium Croatia Cyprus Czech Republic Denmark Estonia Finland France Germany Gibraltar Greece Guemsey Hungary Iceland Ireland Italy Latvia Liechtenstein Lithuania Luxembourg Macedonia Moldova Netherlands Poland Portugal Romania Russia Slovenia Spain Sweden Switzerland Tajikistan Turkey UnitedKingdom Bahrain Egypt Israel Jordan Kuwait Lebanon Malta Morocco Oman Qatar Saudi Arabia AMc.P14) Bangladesh Bhutan India Maldives Nepal Sri Lanka Botswana 3urunmdi Grambia Ghana Kenya Lesotho Malawi Mauritius Namibia Nigeria Rwanda Seychelles Scuth Africa Zambia 81 Appendix 2 Groupings of Countries by Geographical Region, Income Level and Development Status (79 IIeeOECD Argentina Aruba Bahrain Bangladesh Belarus Bhutan Bolivia Botswana Brazil BritishVirginIslands Burundi Cambodia CaymanIslands Chile China Croatia Cyprus Egypt El Salvador Estonia Gambia Ghana Gibraltar Guatemala Guemsey Guyana Honduras India Indonesia Israel Jamaica Jordan Kenya Kuwait Latvia Lebanon Lesotho Liechtenstein Lithuania Macau Macedonia Malawi Malaysia Maldives Malta Mauritius Moldova Morocco Namibia Nepal Nigeria Oman Panama Peru .C . Philippines PuertoRico Qatar Romania Russia Rwanda SaintKittsandNevis Samoa(Western) SaudiArabia Seychelles Singapore Slovenia SolomonIslands SouthAfrica SriLanka Taiwan(China) Tajikistan Thailand Tonga Trinidad& Tobago TurksandCaicosIslands Vanuatu Venezuela Vietnam Zambia (28) Australia Austria Belgium Canada CzechRepublic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Mexico Netherlands NewZealand Poland Portugal Spain Sweden Switzerland Turkey UnitedKingdom UnitedStates 82 Appendix 2 Groupings of Countries by Geographical Region, Income Level and Development Status Argentina Aruba Australia Bahrain Bangladesh Belarus Bhutan Bolivia Botswana Brazil BritishVirginIslands Burundi Cambodia Canada CaymanIslands Chile China Croatia Cyprus CzechRepublic Egypt El Salvador Estonia Gambia Ghana Gibraltar Guatemala Guernsey Guyana Honduras Hungary Iceland India Indonesia Israel Jamaica Japan Jordan Kenya Korea Kuwait Latvia Lebanon Lesotho Liechtenstein Lithuania Macau Macedonia Malaw; Malaysia Maldives Malta Mauritius Mexico Moldova Morocco Namibia Nepal NewZealand Nigeria Oman Panama Peru Philippines Poland PuertoRico Qatar Romania Russia Rwanda SaintKittsandNevis Samoa(Westem) SaudiArabia Seychelles Singapore Slovenia SolomonIslands SouthAfrica Sri Lanka Switzerland Taiwan(China) Tajikistan Thailand Tonga Trinidad& Tobago Turkey TurksandCaicosIslands UnitedStates Vanuatu Venezuela Vietnam Zambia Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxrmbourg Netherlands Portugal Spain Sweden UnitedKingdom 83 Appendix 2 Groupings of Countriesby GeographicalRegion, Income Level and DevelopmentStatus Argentina Aruba Australia Bahrain Bangladesh Belarus Bhutan Bolivia Botswana Brazil British Virgin Islands Burundi Cambodia Canada Cayman Islands Chile China Croatia Cyprus Czech Republic Denmark Egypt El Salvador Estonia Gambia Ghana Gibraltar Greece Guatemala Guernsey Guyana Honduras Hungary Iceland India Indonesia Israel Jamaica Japan Jordan Kenya Korea Kuwait Latvia Lebanon Lesotho Liechtenstein Lithuania Macau Macedonia Malawi Malaysia Maldives Malta Mauritius Mexico Moldova Morocco Namibia Nepal New Zealand Nigeria Oman Panama Peru Philippines Poland Puerto Rico Qatar Romania Russia Rwanda Saint Kitts and Nevis Samoa(Westem) Saudi Arabia Seychelles Singapore Slovenia Solomon Islands South Africa Sri Lanka Sweden Switzerland Taiwan(China) Tajikistan Thailand Tonga Trinidad & Tobago Turkey Turks and CaicosIslands United Kingdom UnitedStates Vanuatu Venezuela Vietnam Zambia Austria Bedgium Finland France Germany Ireland Italy Luxembourg Netherlands Portugal Spain 84 Appendix2 Groupings of Countriesby GeographicalRegion, Income Level and DevelopmentStatus High _com($7) -ppwmM~co~c42S) Aruba Australia Austria Belgium British Virgin Islands Canada Cayman Islands Cyprus Denmark Finland France Germany Gibraltar Greece Guemsey Iceland Ireland Israel Italy Japan Kuwait Liechtenstein Luxembourg Macau Netherlands New Zealand LraI4dtmm0(26) tIlAwaJIcome Argentina Bahrain Botswana Brazil Chile Croatia Czech Republic Estonia Hungary Korea Lebanon Malaysia Malta Mauritius Mexico Oman Panama Poland Puerto Rico Saint Kitts and Nevis Saudi Arabia Seychelles South Africa Trinidad & Tobago Venezuela Belarus Bolivia China Egypt El Salvador Guatemala Guyana Honduras Jamaica Jordan Latvia Lithuania Macedonia Maldives Morocco Namibia Peru Philippines Romania Russia Samoa(Westem) Sri Lanka Thailand Tonga Turkey Vanuatu (19) Bangladesh Bhutan Burnmdi Cambodia Gambia Ghana India Indonesia Kenya Lesotho Malawi Moldova Nepal Nigeria Rwanda Solomon Islands Tajikistan Vietnam Zambia Portugal Qatar Singapore Slovenia Spain Sweden Switzerland Taiwan (China) Turks and Caicos Islands United Kingdom United States 85 Appendix 3 Groupings of Countries by Geographical Region, Income Level and Development Status Dartpd countrls(27) Australia Austria Belgium Canada Cayman Islands Cyprus Denmnark Finland France Germany Gibraltar Greece Iceland Ireland Italy Japan Liechtenstein Luxembourg Netherlands New Zealand Portugal Slovenia Spain Sweden Switzerland UnitedKingdom United States DOfs Argentina Aruba Bahrain Bangladesh Belarus Bhutan Bolivia Botswana Brazil British Virgin Islands Burundi Cambodia Chile China Croatia Czech Republic Egypt El Salvador Estonia Gambia Ghana Guatemala Guernsey Guyana Honduras Hungary India m Indonesia Israei Jamaica Jordan Kenya Korea Kuwait Latvia Lebanon Lesotho Lithuania Macau Macedonia Malawi Malaysia Maldives Malta Mauritius Mexico Moldova Morocco Namibia Nepal Nigeria Oman Panama Peru aft"t (8) Philippines Poland PuertoRico Qatar Romania Russia Rwanda Saint Kitts and Nevis Samnoa(Western) SaudiArabia Seychelles Singapore SolomonIslands South Africa Sri Lanka Taiwan(China) Tajikistan Thailand Tonga Tnnidad & Tobago Turkey Turks and Caicos Vanuatu Venezuela Vietnam Zambia Aruba Bahrain Bangladesh British VirginIslands Cayman Islands Guernsey Saint Kitts and Nevis Turks and Caicos Islands 86 Notesto Appendix3 Income: The World Bankclassifies economiesfor operationaland analyticalpurposesprimarilyby GNP per capita. Every economy is classified as low income,middle income(subdividedinto lower middleand upper middle),or high income. Other Analyticalgroups,based on geographicregions and levels of extemal debt, are also used. Low-incomeand middle-incomeeconomiesare sometimessreferred to as developingeconomies. The term is used for convenience;it does not imply that all such economiesare experiencingsimilardevelopment or that other economieshave reacheda preferred or final stage of development.Nor does classificationby income necessarilyreflect developmentstatus. This table classifies all World Bank membereconomiesas well as all other economieswith populationsof more than 30,000. Economiesare dividedamongincome groupsaccordingto 1999GNPper capita, calculalatedusing the World Bank Atlasmethod. the groupsare as follows:low income,$755 or leE lower middle income, $756-2,995;upper middle income, $2,996-9,265;and high income, $9,266or more. Region: The regions are AME= Americas;MNA = MiddleEast and North Africa; ECA=Europeand Central Asia; SSA = Sub-SaharanAftica; SAS = South Asia; EAP = EastAsia and Pacific; GDP: Figures in italics are the most recent estimate from 1997or 1998.WorldBank Development Indicators, CD-ROM2000. Population, Statistical Abstract of the United States. BankingActivity Regulatoryand Mixing BankingI CommerceRegulatoryVariablesWorldBank and OCC All other Variables,World Bank Survey Sources: U. S. Census of Bureau. 1999. Statistical Abstract of the United States (I 9th edition). Washington, DC. World Bank. 2000. World Development Report, 2000/2001: Attacking Poverty. New York: Oxford World Bank. 2000. World DevelopmentIndicators2000. Washington,D.C. 87 Policy Research Working Paper Series Title Contact for paper Author Date WPS2566Convexityand SheepskinEffects in the HumanCapital Earnings Function:RecentEvidencefor FilipinoMen NorbertR. Schady March2001 T. Gomez 32127 WPS2567 PolicyReform.EconomicGrowth, and the DigitalDivide:An EconometricAnalysis SusmitaDasgupta SomikLall DavidWheeler March2001 Y. d'Souza 31449 WPS2568OwnershipStructureand the Temptationto Loot: Evidencefrom PrivatizedFirmsin the Czech Republic RobertCull Jana Matesova MaryShirley March2001 Z. Kranzer 38526 WPS2569 FromUsersto Custodians:Changing LizAldenWily RelationsbetweenPeopleand the PeterA. Dewees State in ForestManagementin Tanzania March2001 M. Yue 34102 WPS2570Asymmetriesin UnionRelativeWage Niels-HugoBlunch Effectsin GhanaianManufacturing: DorteVerner An AnalysisApplyingQuantile Regressions March2001 M. Clarke 31752 WPS2571 StockMarket Responsesto Bank RestructuringPoliciesduringthe East AsianCrisis DanielaKlingebiel RandyKroszner Luc Laeven Pietervan Oijen March2001 R. Vo 33722 WPS2572 NonfarmIncome,Inequality,and Povertyin RuralEgyptand Jordan RichardH. Adams,Jr. March2001 N. Obias 31986 WPS2573 The GenderImplicationsof Public SectorDownsizing:The Reform Programof Vietnam MartinRama March2001 H. Sladovich 37698 WPS2574How AdverseSelectionAffectsthe HealthInsuranceMarket Paolo Belli March2001 H. Sladovich 37698 WPS2575The Qualityof Bureaucracyand CapitalAccountPolicies Chong-EnBai Shang-JinWei March2001 H. Sladovich 37698 WPS2576Trade Policy,Standards,and Developmentin CentralAmerica Gary Clyde Hufbauer BarbaraKotschwar John S. Wilson March2001 L. Tabada 36896 Policy Research Working Paper Series Title Contact for paper Author Date WPS2577 Developing Rainfall-Based Index Insurance in Morocco Jerry Skees Stephanie Gober Panos Varangis Rodney Lester Vijay Kalavakonda April 2001 P. Kokili 33716 WPS2578 How Accession to the European Union Has Affected External Trade and Foreign Direct Investment in Central European Economies Bartlomiej Kaminski April 2001 L. Taba:la 36896 WPS2579 Public Health and Education Spending in Ghana in 1992-98: Issues of Equity and Efficiency Sudharshan Canagarajah Xiao Ye April 2001 M. Clark.e 31752 WPS2580 On "Indirect" Trade-Related Research Olivier Lumenga-Neso and Development Spillovers Marcelo Olarreaga Maurice Schiff April 2001 L. Tabada 36896 WPS2581 Securities Clearance and Settlement Systems: A Guide to Best Practices Mario Guadamillas Robert Keppler April 2001 H. Issa 30154 WPS2582 Development Financing during a Crisis: Securitization of Future Receivables Suhas Ketkar Dilip Ratha April 2001 S. Crovw 30763 WPS2583 How the Location of Roads and Protected Areas Affects Deforestation in North Thailand Maureen Cropper Jyotsna Puri Charles Griffiths April 2001 V. Soukhanov 35721 WPS2584 Structural Adjustment and Forest Resources: The Impact of World Bank Operations Kiran D. Pandey David Wheeler April 2001 Y. D"Souza 31449 WPS2585 Law, Politics, and Finance Thorsten Beck Asli Demirgoc-Kunt Ross Levine April 2001 A. Yaptenco 31823 WPS2586 On the Urbanization of Poverty Martin Ravallion April 2001 C. Cur.anan 32301 WPS2587 Growth is Good for the Poor David Dollar Aart Kraay April 2001 E. Khine 37471