After the Storm : How Political Institutions Affect Financial Governance in the Wake of Banking Crises

Following a number of banking crises over the past five years, several developed countries have reformed or plan to change their structures of banking supervision in search of macro-prudential blueprints that reduce the likelihood of similar events in the future. Elsewhere, banking crises have occurred with seemingly-increasing regularity over the last three decades. An outpouring of righteous anger among politicians and voters seems to have followed many of those crises, but it is not clear that these emotions lead to actual changes in the structure of regulation and supervision of banks that are able to prevent future instances of insolvency among financial intermediaries. We consider the effect of banking crises on the structure of bank regulation and supervision. Based on Abiad and Detragiache's dataset of banking supervision and on our own compilation of the structure of banking agencies in 70 countries, we aim, first, to describe common patterns of regulatory and supervisory change following banking crises between 1974 and 2005. Second, we purport to understand whether a country's political institutions have an effect on the choice of regulatory and supervisory institutions following a banking crisis. In particular, we assess the effect of the number of veto players on a composite measure of financial reform built from country-year level information on the existence of credit controls, limits on interest rates, extent of bank privatization, and the degree of autonomy of banking agencies. Because such a composite measure shows a definite secular trend toward liberalization, we estimate the effect of veto players in a model that appropriately accounts for time dynamics and cross-country differences. We expect to find that the number of veto players reduces the speed at which countries change their approach to bank regulation and supervision