How Binding Is Supervisory Guidance? : Evidence from the European Calendar Provisioning
This paper investigates whether banks respond differently to supervisory guidance than to specific regulatory action. Using a sample of subsidiaries of European banks operating in developing countries, the study exploits the sequencing in the super...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2022
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/099712205172222193/IDU04756c4680f87d046860b6af0e7a34c058952 http://hdl.handle.net/10986/37449 |
| Summary: | This paper investigates whether banks
respond differently to supervisory guidance than to specific
regulatory action. Using a sample of subsidiaries of
European banks operating in developing countries, the study
exploits the sequencing in the supervisory and regulatory
implementation of a reform on provisioning for credit losses
for identification, generally referred to as European
calendar provisioning. While the reform achieved the
intended goal of reducing European banks’ nonperforming loan
ratios, its effects were greater during the initial
implementation of the supervisory guidance than after its
enactment as a binding regulation. This finding is
consistent with the notion that the subsequent formalization
of the supervisory initiative within a regulatory framework
achieved limited results because it eliminated the
flexibility the regulatory authority had concerning the
stringency with which European calendar provisioning was
enforced. Finally, the study offers evidence of a mechanism
through which policies in advanced economies affect banking
outcomes in developing countries to which their local
financial authorities should be alert. |
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