This paper uses our new database on bank regulation and supervision in 107 countries to assess the relationship between specific regulatory and supervisory practices and banking-sector development, efficiency, and fragility. The paper examines: (i) regulatory restrictions on bank activities and the mixing of banking and commerce; (ii) regulations on domestic and foreign bank entry; (iii) regulations on capital adequacy; (iv) deposit insurance system design features; (v) supervisory power, independence, and resources; (vi) loan classification stringency, provisioning standards, and diversification guidelines; (vii) regulations fostering information disclosure and private-sector monitoring of banks; and (viii) government ownership. The results, albeit tentative, raise a cautionary flag regarding government policies that rely excessively on direct government supervision and regulation of bank activities. The findings instead suggest that policies that rely on guidelines that (1) force accurate information disclosure, (2) empower private-sector corporate control of banks, and (3) foster incentives for private agents to exert corporate control work best to promote bank development, performance and stability

We investigate the regulation of labor markets through employment, collective relations, and social security laws in 85 countries. We find that the political power of the left is associated with more stringent labor regulations and more generous social security systems, and that socialist, French, and Scandinavian legal origin countries have sharply higher levels of labor regulation than do common law countries. However, the effects of legal origins are larger, and explain more of the variation in regulations, than those of politics. Heavier regulation of labor is associated with lower labor force participation and higher unemployment, especially of the young. These results are most naturally consistent with legal theories, according to which countries have pervasive regulatory styles inherited from the transplantation of legal systems

Existing regulatory capital requirements are often criticized for only being loosely linked to the economic risk of the banks' assets. In view of the attempts of international regulators to introduce more risk sensitive capital requirements, we theoretically examine the effect of specific regulatory capital requirements on the risk-taking behavior of banks. More precisely, we develop a continuous time framework where the banks' choice of asset risk is endogenously determined. We compare regulation based on the Basel I building block approach to value-at-risk or ‘internal model’-based capital requirements with respect to risk taking behavior, deposit insurance liability, and shareholder value. The main findings are: (i) value-at-risk-based capital regulation creates a stronger incentive to reduce asset risk when banks are solvent, (ii) solvent banks that reduce their asset risk reduce the current value of the deposit insurance liability significantly, (iii) under value-at-risk regulation the risk reduction behavior of banks is less sensitive to changes in their investment opportunity set, and (iv) banks' equityholders can benefit from risk-based capital requirements

We examine whether Regulation Fair Disclosure (Reg FD) has reduced the informativeness of analysts’ information outputs. For a sample of financial analysts’ earnings forecasts and recommendations released in a 2-year window around Reg FD's effective date, we show that in the post-Regulation FD period the absolute price impact of information disseminated by financial analysts is lower by 28%. We also show that the drop in price impact varies systematically with brokerage house and stock characteristics related to the level of selective disclosure prior to Reg FD. Based on the time-series and cross-sectional evidence we conclude that Reg FD has been effective in curtailing selective disclosure

We study optimal enforcement in credit markets in which the only threat facing a defaulting borrower is restricted access to financial markets. We solve for the optimal level of exclusion, and link it to observed institutional arrangements. Regulation in this environment must accomplish two objectives. First, it must prevent borrowers from defaulting on one bank and transferring their resources to another bank. Second, and less obviously, it must give banks the incentive to make sizeable loans, and to honour their promises of future credit. We establish that the optimal regulation resembles observed laws governing default on debt. Moreover, if debtors have the right to a “fresh start” after bankruptcy then this must be balanced by enforceable provisions against fraudulent conveyance. Our optimal regulation is robust, in that it can be implemented in a way that does not require the regulator to have information about either the borrower or lender. Our results isolate the way in which specific institutions surrounding bankruptcy—namely rules governing asset garnishment and fraudulent conveyances—support loan markets in which borrowers have no collateral

Most financial risk regulations assume that asset returns are exogenous, where risk is estimated from historical data. This assumption fails to take into account the feedback effect of trading decisions on prices. We investigate the consequences of risk constrained trading by means of simulations of a general equilibrium model with a value-at-risk constraint and compare the results to the case when risk constraints are not present. Prices are lower on average in the presence of risk regulation, while volatility is higher. Risk regulation may have the perverse effect of exacerbating price fluctuations

Acquisitions, mergers, and other business agreements face increasing regulatory scrutiny, even when they involve firms domiciled outside the territory of regulatory authorities. Recent examples include mergers between American firms that were approved by American regulators but blocked by European regulators. Regulatory reciprocity seems a likely future trend. There are obvious consequences for the successful completion of future business combinations. This paper explains the regulatory procedures of the European Commission with respect to business combinations, documents the price reactions of subject firms on dates from the initial announcement to the final regulatory decision, and studies whether European regulators tend to shield European firms from foreign competition. Our main results are: i) the market clearly reacts to European regulatory intervention even when the subject firms are non-European, ii) the probability of intervention is not related to the nationality of the bidder, however, iii) when intervention does occur, the market anticipates it will be more costly when the bidder is non-European, so protectionism cannot be rejected outright, and iv) regulatory interventions are anticipated by investors, so they affect the initial announcement returns

In October 2000, the Securities and Exchange Commission (SEC) passed Regulation Fair Disclosure (FD) in an effort to reduce selective disclosure of material information by firms to analysts and other investment professionals. We find that the information asymmetry reflected in trading costs at earnings announcements has declined after Regulation FD, with the decrease more pronounced for smaller and less liquid stocks. Return volatility around mandatory announcements is also lower but overall information flow is unchanged when mandatory and voluntary announcements are combined. Thus, the SEC appears to have diminished the advantage of informed investors, without increasing volatility

Recent initiatives to improve the public information about individual firms have brought to the fore significant differences in perspective between accountants and prudential regulators. We examine the reasons for these differences and propose ways in which they could be reconciled within a broader framework aimed at identifying the type of information conducive to the proper functioning and stability of the financial system. We argue that such information should concern three characteristics: estimates of current financial condition; estimates of risk profile; and measures of the uncertainty surrounding those estimates. So far, efforts have mainly focused on the first characteristic, with the second having drawn attention only recently and the third having been largely neglected. We propose a strategy to reconcile different perspectives based on two principles: first, in the long-term, the “decoupling” of the objective of accurate financial reporting by the firm from that of instilling the desired degree of prudence in its behaviour; second, a “parallel transition” process towards that objective so that at all points the prudential measures can neutralise any undesirable implications of changes in financial reporting standards on financial stability

This paper investigates whether the industrial relations climate in Indian states has affected the pattern of manufacturing growth in the period 1958–1992. We show that states which amended the Industrial Disputes Act in a pro-worker direction experienced lowered output, employment, investment, and productivity in registered or formal manufacturing. In contrast, output in unregistered or informal manufacturing increased. Regulating in a pro-worker direction was also associated with increases in urban poverty. This suggests that attempts to redress the balance of power between capital and labor can end up hurting the poor