Do institutions matter? Political economy of the enhancement of banking supervision.

The aim of this study is to examine the degree to which a country's institutional quality, such as the degree of central bank independence and the rule of law, matters for enhancing banking supervision. While numerous studies have examined the effects of central bank independence (CBI) on inflation and the quality of governance on economic growth and development, empirical studies exploring these institutional impacts on banking supervisory regimes remain scarce. Hence, this study analyzes the political economy of enhancing the supervision over the banking sector using the expanded indices of enhancement of banking supervision for 100 economies from 1973 to 2013, which accounts for both institutional and operational independence of banking supervisory agencies. The results demonstrate that institutions matter in enhancing a country's banking supervision; a higher degree of central bank independence and the rule of law leads to a higher degree of banking supervision. I also analyze the sectoral impact on banking supervision. While resource curse theory holds, the results of sectoral influence tend to differ depending on the estimation method. [ABSTRACT FROM AUTHOR]