What determines the "legal" quality of bank regulation and supervision?

Abstract

This article has two contributions. First, using the methodology of Neyapti and Dincer, it provides measures of legal quality of bank regulation and supervision (RS) for a new set of developed and less-developed countries. Second, it investigates the determinants of RS in view of the hypothesis that the existing institutional environment matters for the quality of formal institutions such as banking laws. The empirical evidence in this article demonstrates that past financial crises and prevailing levels of both financial market development and foreign direct investment inflows affect RS beyond and above the effects of other potential factors, such as macroeconomic performance and good governance. Evidence from transition economies also supports these findings. (JEL E44, G2, K29, O1) © 2008 Western Economic Association International.