Financial Sector Governance in Banking Supervision : Theory and Practices

This paper examines the relationship between the quality of banking supervision and governance of the supervisory agency. The analysis is based on indices constructed from the assessment of the Basel Core Principles for Effective Banking Supervision that measure the quality of banking supervision, and the IMF Transparency Code on Financial Policies that measure elements of good governance. The database covers assessment results of BCP and transparency code for 116 and 53 countries, respectively, with 51 common to both. Countries with effective supervision tend to have good governance of their supervisory agency. We find significant positive correlation between the BCP chapter 1 sub-index related to governance and sub-indices for effective supervision. We also find significant positive correlation between the BCP and Transparency Code indices. These results are largely robust to different stages of financial development