The Link between International Supervision and Banking Crises

Theoretical and empirical contributions of some economists have shown that a financial liberalisation policy implemented in a less developed institutional environment enhances the proliferation of banking crises. This leads to the conclusion that failure at the level of banking governance plays a significant role in the emergence of crises. By using multivariate logit, our empirical study samples of 12 emerging countries to study the relationship between banking supervision and banking crises during the period 1980-2003. Our results show a negative and insignificant association between banking regulation and the probability of occurrence of banking crises. We find the likelihood of banking crises is greater in countries with poor banking supervision. In short, the condition required for a sound banking system is to reinforce banking supervision during financial liberalisation phases.