Prudential Regulation and Supervision of the Banking Sector and Banking Crises: A Cross Country Empiricial Investigation

Abstract

The main purpose in this study is to see empirically whether there really exists a clear association between weaknesses in the regulation and supervision of the banking sector and banking crises. Test results indicate that capital regulations are a major factor in the prevention of crises, giving important support to the propositions towards ensuring higher capital requirements. However, tighter capital regulations do not seem to mitigate the negative impact of moral hazard problem generated by generous deposit insurance system. While inflation has a significant role in the generation of crisis, its significance weakens to a major extent, when accompanied with regulatory and supervisory factors. Hence, the significance of regulatory and supervisory framework of the banking system is once more justified.Banking Regulation and Supervision, Banking Crisis.