Recherche sur l'argent, la banque et la finance

The Structure of Bank Supervision and Corruption in Lending:

A Study for Transition Economies

HASANNUDIN, Zenathan Adnin

Supervised by Professor Jézabel Couppey-Soubeyran

University of Paris 1 Pantheon-Sorbonne UFR 02 Economics

Master 2 Research Money, Bank, and Finance

2012

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Statement of Authorship

“University of Paris 1 Pantheon Sorbonne does not intend to give any approval or

disapproval to the opinion issued in this master thesis, they must be regarded as the

property of the author.”

For my parents,

Paris, 12th June 2012

Zenathan Adnin HASANNUDIN

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Abstract

This paper try to examine the relation between the structure of bank supervision and corruption

in lending based on the data from 21 transition economies in Eastern Europe and Central Asia.

We support Beck, Kunt, and Levine (2006) that higher supervisory power will increase the

degree of corruption in lending while supervisory policies which promote private monitoring by

pushing banks to disclose accurate information and give incentives to private agents to monitor

bank will reduce the degree of corruption in lending. As the main finding in this paper, we prove

that the structure of bank supervision has significant effect to corruption in lending. More

specifically, we found that the degree of corruption in lending will increase when the bank

supervisor function is not in the central bank. We also have found that after we control our model

with various country-level variables, the higher independency of bank supervisor will decrease

the degree of corruption in lending.

Keyword: Bank Supervision, Central Bank, Corruption

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Contents

Statement of Authorship.................................................................................................................. ii

Abstract .......................................................................................................................................... iii

Chapter 1: Introduction ................................................................................................................... 1

Chapter 2: Literature Review .......................................................................................................... 5

2.1 The importance of bank regulation and supervision ............................................................. 5

2.2 Corruption in Lending ........................................................................................................... 8

2.3 The Structure of bank supervision ....................................................................................... 12

Chapter 3: Data and Methodology ................................................................................................ 15

3.1 The Data and Samples ......................................................................................................... 15

3.2 Methodology ........................................................................................................................ 16

3.3 Variables .............................................................................................................................. 17

Chapter 4: Empirical Result .......................................................................................................... 23

4.1 Bank Supervision and Corruption in Lending ..................................................................... 23

4.2 The Structure of Bank Supervisor and Corruption in Lending ........................................... 25

4.3 Nonlinear Effect & Interactions Terms ............................................................................... 26

4.4 Robustness to Control other Country-Specific Factors ....................................................... 28

Chapter 5: Conclusion ................................................................................................................... 31

References ..................................................................................................................................... 32

Appendix I: Variables and Source ................................................................................................ 34

Appendix II: Tables of the Result ................................................................................................. 36

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Chapter 1: Introduction

In these recent days, banks around the globe are one of the primary sources of external finance

through their ability to lend money for enterprises. Efficient banking system would be able to

channeling and monitoring savings to the most productive investment project and furthermore

increase

...