Prudential Regulation of Banks in Less Developed Economies

This study suggests that crises in banking are more likely in years of low growth and high real interest rates. It analyses the banking crises using a logit econometric model covering a sample of developed and developing countries between 1980 and 1997. It concludes that tight liquidity in the banking sector is also related to the banking crises.

The paper aims to make a policy oriented empirical and theoretical contribution to prudential bank regulation for less developed countries (LDC). LDCs face inherent obstacles in setting up efficient regulation and building up a sound banking sector. The paper also elaborates on:

• Carrying out empirical analysis on the determinants of banking crises using macroeconomic, financial, and institutional variables;
• Providing theory emphasizing the difficulties of regulation;
• Critically analyzing the policy advice with regard to prudential regulation;
• Providing policy recommendations.