How to measure banking regulation and supervision

Abstract

Using data from 141 countries, this paper identifies the variables that best characterize banking regulation and supervision practices around the world. A nonlinear principal components analysis with optimal variable transformation is used to deal with the mixed measurement levels of the variables and to reduce data dimensionality; and results robustness is tested for different subsamples. Deposit insurance, liquidity and diversification requirements, complementary banking activities and market discipline are found to be the most reliable indicators to measure regulation, while resolution activities, the mandate of the head of the supervisory agency and the report of prudential regulation infractions assume the same role for banking supervision. Capital requirements and ownership are of minor relevance and are sensitive to country’s development level. The most distinct regulation practices are displayed by China and Germany, while in terms of supervision China and the UK adopt the most extreme policies.