Bank Regulation, the Quality of Institutions, and Banking Risk in Emerging and Developing Countries:An Empirical Analysis

Using data for 371 banks from nonindustrial countries for the period 2002-8, we examine the effect of bank regulation and supervision on banking risk. Our main findings suggest that stricter regulation and supervision reduces banking risk. Notably, capital regulations and supervisory control reduce bank riskiness. Liquidity regulation and activities restrictions also restrain banking risk but only when there is a high level of institutional quality. Finally, we find that the effect of regulation and supervision also depends on the level of development.