The Role of Legal (public) and Regulatory Institutions in Financial Development- Emphasizing Banking Sector

Monetary and banking crisis and their heavy costs during the last three decades resulted in increasing attention to the role of institutional environment, public policy as well as regulatory governance. New research works are done to define indicators to evaluate supervisory rules and regulations in financial markets. The Basel Committee on Banking Supervision- a group of representatives of bank supervisors from advanced countries-issued the Core Principles in 1997 to standardize financial market for Effective Banking Supervision. These principles are accepted by many countries in the world. In this research, we first, investigated the role of institutional environment in banking sector development encompassing 53 countries from 2000 to 2008. The results indicate that well-developed legal (public) institutions have significant effect on banking sector credit expansion. Second, we constructed regulatory indicators based on the assessment of The Basel Committee regarding accountability and independence arrangements for those 53 countries, for which the required data was available. Then, we studied the effect of those indicators on credit expansion in banking system. The results have shown the lack of a significant relationship between banking credit development and the rate of accountability and independence arrangements (as suggested by Basel Committee assessments). Although, these results confirm Ranjit Lall's findings (2009), more information is needed- at least for two periods.