This paper suggests that accounting and auditing systems can be effective devices to counteract tendencies for firm risk-taking associated with bank safety nets. Results are obtained from an international sample of publicly traded banks after controlling for other regulatory control devices for bank risk such as restrictions on banking activities, minimum regulatory capital requirements and official discipline. The efficacy of accounting and auditing systems in controlling bank risk diminishes with bank charter value and increases with moral hazard stemming from a country's deposit insurance. The results also indicate that accounting and auditing systems are complements for minimum capital requirements, but substitutes for restrictions on bank activities and official discipline.

The paper analyzes the influence of banking stability on the volatility of industrial value added using data for 110 countries. Our results confirm the relevance of lending and asset allocation effects because banking stability reduces the volatility of value added more in industries that have greater external financial dependence and intangible intensity when they are located in countries with more developed financial and institutional systems. Moreover, banking stability helps reduce economic volatility more in countries with less bank market competition. We control for recessions, reverse causality problems, and endogeneity of banking stability.