International patterns of bank regulation: The effects of political institutions, financial liberalization, and exchange rate regimes

This dissertation investigates international patterns in bank regulation in three essays. The first essay considers how flexibility in bank regulation, together with a country's political institutions, determines the impact of bank regulation. Using a principal-agent framework, I develop a political economy model to explore the influence of special interests on the success of regulatory regimes, suggesting that accountability of the regulator is important for the appropriate level of flexibility in bank regulation. I construct measures of bank regulatory rigidity using a cross-country dataset of bank regulation. Banking sector performance proxies for regulatory quality while measures of democracy gauge accountability. I also examine case studies of Uruguay and the Philippines. Flexible regulation does not appear to work as well in countries without checks and balances on executive power, while rigid regulation is less successful in democratic settings. I find evidence that the downside of rigid regulation is the inability of regulation to respond to macroeconomic shocks.; Appropriate bank regulation is a key ingredient in the conventional recipe for successful financial liberalization without rigorous empirical verification of its influence. The second essay questions whether the empirical evidence corroborates the conventional wisdom by exploring the effect of bank regulatory stringency on financial liberalization. I look across the stages of financial liberalization at both domestic banking sector reform and capital account liberalization. Results indicate that, while stringent bank regulation is beneficial to recent liberalizers, apparently because it minimizes the transitional risks of adjustment, non-recent liberalizers exhibit better banking sector performance with less stringent regulation. I find that the crossover point occurs between five and ten years after liberalization.; The third essay explores the relationship of bank regulatory stringency and exchange rate regime as it impacts financial deepening. Floating exchange regimes see more financial deepening when combined with stringent bank regulation, while fixed and intermediate regimes have slower financial deepening when bank regulation is stringent. The benefit of less stringent regulation among fixers rises with stronger commitment mechanisms to the peg, but disappears among developing countries. I examine four candidate explanations for these findings, but none of the hypotheses demonstrate validity in the tests performed.