A STRUCTURAL APPROACH TO FINANCIAL STABILITY: ON THE BENEFICIAL ROLE OF REGULATORY GOVERNANCE

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Abstract

This paper examines whether the governance of regulatory agencies – regulatory governance – is positively related to financial sector soundness. We model regulatory governance and financial stability as latent variables, using a structural equation modeling approach. We include a broad range of variables potentially relevant to financial stability, employing aggregate regulatory, banking and financial, macroeconomic and institutional environment data for a sample of 55 countries over a period from 2001 to 2005. Given the growing importance of macro-prudential analysis, we use the IMF’s financial soundness indicators, a relatively new body of economic statistics which focuses on the banking sector as a whole. Our empirical evidence indicates that regulatory governance has a beneficial influence on financial stability. Thus, our findings support the view that the improvement of regulatory governance arrangements should be a building block of financial reform.

Keywords: Financial Stability, Regulatory Governance, Regulatory Authorities, Banking Sector

How to cite this paper: Mohr, B., & Wagner, H. (2013). A structural approach to financial stability: On the beneficial role of regulatory governance. Journal of Governance and Regulation, 2(1), 7-26. https://doi.org/10.22495/jgr_v2_i1_p1