Does the speed of adjustment in regulation and supervision affect financial stability in developing countries?
| DOI | https://doi.org/10.1108/JFRC-08-2018-0111 |
| Pages | 453-463 |
| Date | 20 June 2019 |
| Published date | 20 June 2019 |
| Author | Chadi Azmeh |
| Subject Matter | Financial compliance/regulation,Financial risk/company failure |
Does the speed of adjustment in
regulation and supervision
affect financial stability in
developing countries?
Chadi Azmeh
Department of Banking and Financial Sciences,
International University for Science and Technology,
Damascus, Syrian Arab Republic
Abstract
Purpose –This paper aims to examinethe impact of bank regulation and supervision on financialstability.
Financial sector reform, especially in developing countries, takes the form of a sudden adjustment in
regulation and supervision. The main objective of the paper is to examine whether this fast and sudden
adjustment in regulation and supervisionhas an undesirable impact on financial stability. Furthermore,the
paper examines the role of real economic development in determining the impact of financial reform on
financialstability.
Design/methodology/approach –Empirically, on asample of 57 developing countries overthe period
2000-2013, the author explored the impact of bank regulation and supervision on financial stability for
different sub-groups of countries. The division is based on the real levelof economic development and, most
importantly, on the speed of adjustment in regulation and supervision. The study uses the cross-sectional–
ordinary leastsquare model. Each country hasthree observations (average2000-2004, average 2005-2008and
average 2009-2013),which are convenient, with the date of the three surveys on regulation and supervision
(2002-2006-2011). The period of the averages is selected to cover periods before and after the survey as
regulationand supervision may be adoptedbefore the survey and as its impact maypersist for the period after.
Findings –The major finding of this study is that itsupports the important role of the speed of adjustment
in regulation and supervision, and its impact on financial stability. Soft adjustment in regulation and
supervision has more positive impact on financial stability than fast adjustment. Activity restrictionshave
positive and significantimpact on financial stability in soft adjustment countries’group.On the other hand, in
countries with fast adjustment, results show negative and statistically significant impact on financial
stability, especially for supervisory independence. More time is needed for supervisors to adapt to new
regulation and supervisionand gain expertise to monitor financialcondition of banks in a consistent manner.
Results also show that the level of economic development is an important factor when testing the impact of
regulation and supervision on financial stability. In lower income countries, more room is available for
corruptionin lending, which has a negative impact on financial stability.
Practical implications –This study advocates the necessity of taking the speed of adjustment in
regulation and supervision by policymakersin developing countries, while initiating reform in the financial
sector. Financialsector reform that takes the form of a sudden adjustment in regulation and supervisionmay
have undesirable results in termsof financial stability. On the other hand, soft adjustment in regulation and
supervision, which gives more room for supervisors to adapt and gain expertise, may have more positive
impact on financialstability.
Originality/value –This paper is the first paper to explore new methods of calculating the speed of
adjustment in regulation and supervision, and to examine whether the high speed of financial reform in
developingcountries has an undesirable impact on financial stability.
Keywords Financial stability, Developing countries, Financial reform,
Bank regulation and supervision, Soft adjustment, Sudden adjustment
Paper type Research paper
Speed of
adjustment in
regulation
453
Received16 August 2018
Revised22 December 2018
8 February2019
Accepted16 April 2019
Journalof Financial Regulation
andCompliance
Vol.27 No. 4, 2019
pp. 453-463
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-08-2018-0111
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