Economics India

Thursday, January 05, 2006

Rethinking Bank Regulation: Till Angels Govern

I must bring to your attention the recent publication of the new book -- Till Angels Govern -- by the Cambridge University Press. Edited by James R. Barth (Auburn U and Milken Institute), Gerard Caprio Jr (The World Bank and Williams College), and Ross Levine (Brown U), the book "provides a striking evidence (using a unique data set created at the World Bank) that strengthening of discretionary powers of prudential supervisors in countries with weak institutional environments leads to lower level of bank development, greater corruption in lending, and banks that are less safe and sound. Following the Basel II recommendations of strengthening supervisory powers, therefore, may do more harm than good in developing countries, unless it is unaccompanied by substantial progress in institutional development. This book provides an important warning to policy makers that what works for advanced countries may not work for developing countries." Reserve Bank of India and its Board of Supervision may take a note. One reviewer has commented that "developing countries need to place far more emphasis on policies that promote market discipline, like disclosure requirements, than on command and control regulations that often translate into discretionary abuse". More later ....


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