Banking regulation and supervision: conceptual framework and stylized facts (2024)

  • Bob Cull
  • Davide Salvatore Mare

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Banking regulation and supervision: conceptual framework and stylized facts (1)

The first chapter of the recently released Global Financial Development Report 2019/2020: Bank Regulation and Supervision after the Global Financial Crisis (GFDR 2019/2020) presents both the theoretical premises for bank regulation and supervision and the associated polices that have been enacted across countries. Prompted by the worst financial crisis since The Great Depression, these topics have been hotly debated, and the report re-visits and summarizes those debates and subsequent developments. But unlike other reports and analyses, the focus of GFDR 2019/2020 is on how changes in bank regulation and supervision have affected less developed economies.

Although there have been much research and discussion on the topic, there was a lack of systematic evidence on the detailed reforms undertaken by advanced and developing countries. To fill this void, we released the fifth round of the World Bank’s Bank Regulation and Supervision Survey (BRSS 2019) at the same time that we released GFDR 2019/2020. The survey covers information on 160 jurisdictions at all levels of economic development (Figure 1). Empirical analyses based on BRSS 2019 data fed into the GFDR 2019/2020 and a background paper (Anginer et al., 2019) describing the data set and developments in regulation and supervision.


Banking regulation and supervision: conceptual framework and stylized facts (2)

Developing countries face a key challenge in trying to adapt international regulatory and supervisory frameworks that were designed for the banking sectors of advanced economies. For example, a growing number of those countries have adopted components of the Basel II and III international regulatory accords since the crisis. But most have been selective in their adoption, eschewing some of the more complicated aspects of those accords. Given their current supervisory capacity, these choices were likely advisable. More generally, the purpose, objectives and tools for banking regulation and supervision in less developed countries will need to be continuously discussed and updated, since globalization in financial services and rapid technological change make it increasingly challenging to provide effective oversight.

The chapter provides evidence on the reforms undertaken since the recent crisis focusing on three key areas: capital regulation, market discipline and bank supervision. Analysis reveals that reforms after the crisis led to an increase in capital requirements and implementation of new resolution processes for systemically important banks. However, even though regulatory capital ratios are now at their highest levels since the crisis, that development has been accompanied by a shift toward asset categories with lower risk weights. Thus, improvements in capital hinge on the extent to which risk weights reflect the actual risk across different asset classes. In addition, most authorities now allow a wider array of instruments to satisfy Tier 1 capital requirements—the regulatory capital component intended to have the greatest capacity for loss absorption. This issue is important since it may lead to deterioration of the quality of regulatory capital in the future.

Many countries also introduced a binding leverage ratio to limit the adverse effects of financial leverage on bank stability. Regression results show that bank capital ratios did, in fact, increase significantly for countries that were hit by the financial crisis (Figure 2). However, and contrary to the positive trends for capital ratios, BRSS 2019 data show that the definition of capital became less stringent since a higher percentage of countries allow for the inclusion of hybrid debt capital instruments, asset revaluation gains and subordinated debt in calculating Tier 1 capital (shown on the far right of Figure 2). Moreover, gains in bank leverage ratios, which proved simpler to measure and monitor during the crisis, were not significant for crisis countries.


Banking regulation and supervision: conceptual framework and stylized facts (3)

Source: Anginer et al. (2019).

Note: The figure shows coefficients (marked with a diamond) for a dummy variable indicating whether a country experienced a banking crisis between 2007 and 2009, and confidence intervals for those coefficients computed at the 10 percent significance level. The cross-country regressions relate changes in the four measures of bank capital to a set of explanatory variables, including the banking crisis dummy.

BRSS data also shows that deposit insurance systems around the world expanded and became more generous. The availability and quality of information disclosed as part of bank supervision have not improved significantly. Such factors may have undermined market discipline, reducing the incentives and ability of the private sector to monitor financial institutions. Although new regulations have been put in place since the crisis to improve the resolution of systemically important banks, cross-border resolution systems remain underdeveloped, and many of these mechanisms are untested. After the crisis, bank supervision became stricter and more complex. But supervisory capacity did not improve proportionally to match the greater complexity of bank regulations. Capacity constraints for bank supervisors may therefore limit the monitoring and enforcement of the rules.

Overall the evidence reported in Chapter 1 and the analysis of the literature suggest that the policy interventions and regulatory changes with respect to banking have had important implications for market discipline and bank capitalization. Capital requirements and regulatory capital holdings for banks have increased, though again the finding on holdings hinges on how assets are risk-weighted. There are also indications that financial safety nets became more generous in many countries, and that supervisory capacity has struggled to keep pace with the extent and complexity of new banking regulations. In short, despite substantial progress on bank regulation in multiple areas, there is still cause for concern about future bank stability, especially among large multinational banks.

Cited references

Anginer, D., Bertay, A. C., Cull, R., Demirgüç-Kunt, A., & Mare, D. S. (2019). Bank Regulation and Supervision Ten Years after the Global Financial Crisis.


Financial Sector


Bob Cull

Lead Economist, DEC

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Davide Salvatore Mare

Research Economist

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I am an enthusiast and expert in the field of global financial development, particularly in the area of bank regulation and supervision. My knowledge is deeply rooted in both theoretical foundations and practical applications, allowing me to analyze and interpret the complex dynamics of the global financial system.

The article in question, penned by Bob Cull and Davide Salvatore Mare on January 6, 2020, delves into the Global Financial Development Report 2019/2020. This report focuses on the theoretical premises for bank regulation and supervision, examining policies enacted globally in response to the 2008 financial crisis. Unlike many other analyses, the unique aspect of the GFDR 2019/2020 is its emphasis on the impact of these changes on less developed economies.

To substantiate their findings, the authors released the fifth round of the World Bank’s Bank Regulation and Supervision Survey (BRSS 2019) simultaneously with the GFDR 2019/2020. The survey covers information from 160 jurisdictions, providing a comprehensive look at the reforms undertaken by both advanced and developing countries.

The key challenge highlighted in the article is the adaptation of international regulatory frameworks, such as Basel II and III, by developing countries. While many have embraced aspects of these accords, they often do so selectively, avoiding more complex components. The authors argue that continuous discussions and updates are necessary due to the challenges posed by globalization in financial services and rapid technological changes.

The evidence presented in the article focuses on three crucial areas: capital regulation, market discipline, and bank supervision. The analysis reveals that reforms post-crisis have led to increased capital requirements and the implementation of new resolution processes for systemically important banks. However, there's a notable shift toward asset categories with lower risk weights, potentially impacting the quality of regulatory capital.

Moreover, the article highlights the introduction of binding leverage ratios to curb the adverse effects of financial leverage on bank stability. While there's an increase in bank capital ratios, the definition of capital has become less stringent, with more countries allowing the inclusion of hybrid debt capital instruments and subordinated debt in Tier 1 capital.

The BRSS 2019 data also indicates the expansion and increased generosity of deposit insurance systems worldwide. However, the quality of information disclosed as part of bank supervision has not significantly improved, potentially undermining market discipline. The authors express concern about the lagging supervisory capacity, limiting effective monitoring and enforcement of the evolving rules.

In summary, despite significant progress in various aspects of bank regulation, the article suggests lingering concerns about future bank stability, especially among large multinational banks. The evidence provided underscores the intricate interplay between regulatory changes, market discipline, and bank capitalization in the post-global financial crisis landscape.

Banking regulation and supervision: conceptual framework and stylized facts (2024)


What is the regulation and supervision of the banking sector? ›

The Banking Regulation Act, 1949 empowers the Reserve Bank of India to inspect and supervise commercial banks. These powers are exercised through on-site inspection and off site surveillance.

What are the three logical objectives of regulation and supervision? ›

Objectives of the Supervision and Regulation function include protecting depositors' funds; protecting consumer rights related to banking relationships and transactions; and maintaining a stable, efficient and competitive banking system.

What is the difference between bank supervision and bank regulation? ›

Bank regulation refers to the written rules that define acceptable behavior and conduct for financial institutions. The Board of Governors, along with other bank regulatory agencies, carries out this responsibility. Bank supervision refers to the enforcement of these rules.

What are the three components of bank regulation? ›

Common bank regulations include reserve requirements, which dictate how much money banks must keep on hand; capital requirements, which dictate how much money banks can lend; and liquidity requirements, which dictate how easily banks can convert their assets into cash.

What are the three pillars of banking supervision? ›

The banking union is based on three pillars: the Single Supervisory Mechanism (SSM) the Single Resolution Mechanism (SRM) the European Deposit Insurance Scheme (EDIS)

Why is bank supervision and regulation important? ›

Keeping banks safe and sound, and anchoring financial stability, hinges as much on good supervision as on effective risk management and governance in banks, robust regulation, and vigilant markets.

What are the goals of regulation and supervision? ›

Once the rules and regulations are established, supervision—which involves monitoring, inspecting, and examining financial institutions—seeks to ensure that an institution complies with those rules and regulations, and that it operates in a safe and sound manner.

What are the four primary objectives of regulation? ›

There are four primary goals of regulation: restrictive regulation, reactive regulation, proactive regulation, and transparent regulation. Many regulators draw upon some combination of these four ideals in their work. The extent to which each goal is utilized varies from regulator to regulator.

How are supervision and regulation distinguished? ›

If regulation sets the rules of the road, supervision is the process that ensures obedience to these rules (and sometimes to norms that exist outside these rules entirely). Regulation is the highly choreographed process of generating public engagement in the creation of rules.

What are the two types of banking regulation? ›

Bank regulation—two distinct types

There are two broad classes of regulation that affect banks: safety and soundness regulation and consumer protection regulation.

What is the Basic Committee on banking supervision? ›

The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters. Its 45 members comprise central banks and bank supervisors from 28 jurisdictions.

What role does bank supervision play in supporting a stable economy? ›

A key part of supervision is ensuring that banks are in compliance with regulations, but supervision also involves qualitative assessments of banks' internal processes, controls, governance and risk management—and taking enforcement actions when weaknesses are discovered.

What is one major aspect of bank regulation? ›

Bank regulation is intended to maintain banks' solvency by avoiding excessive risk. Regulation falls into a number of categories, including reserve requirements, capital requirements, and restrictions on the types of investments banks may make.

What are the benefits of bank supervision? ›


In this sense, supervision as a body measuring compliance with the regulations is a contributing factor to strengthening confidence in the banking sector. The results of the checks carried out by supervisors are the tools enabling the measurement of compliance and respectability of a bank.

What does bank supervision entail? ›

Bank supervision is a supervisory function charged with the responsibility of ensuring the safety and soundness of the banking system as a whole.

What is the banking regulation in the US? ›

U.S. banking regulation addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and the promotion of lending to lower-income populations. Some individual cities also enact their own financial regulation laws (for example, defining what constitutes usurious lending).

What are the main banking regulations? ›

  • Five Important U.S. Banking Laws.
  • National Bank Act of 1864.
  • Federal Reserve Act of 1913.
  • Glass-Steagall Act of 1933.
  • Bank Secrecy Act of 1970.
  • Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
  • The Bottom Line.

Who is the regulator of the banking sector? ›

The RBI is the money market and the banking regulator in India.

What is regulatory compliance in the banking industry? ›

Regulatory compliance is like a suit of armor that helps protect your financial institution from vulnerabilities that put you at risk of hefty fines or irrevocable damage. One challenge of maintaining compliance is that it can be difficult to stay on top of the constant change in regulations.


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