How to measure banking regulation and supervision

This paper uses data from 141 countries to identify the variables that best characterize worldwide banking regulation and supervision practices. We apply a nonlinear principal components analysis with optimal variable transformation to deal with the variables’ mixed measurement levels and reduce data dimensionality. The robustness of the results is tested for different subsamples. The findings indicate that deposit insurance, liquidity, diversification requirements, complementary banking activities, and market discipline are the most reliable indicators to measure regulation. In contrast, resolution activities, the mandate of the head of the supervisory agency, and the report of prudential regulation infractions assume the same role for banking supervision. Capital requirements and ownership are of minor relevance and are sensitive to a country’s development level. China and Germany display the most distinct regulation practices, while China and the UK adopt the most stringent policies regarding supervision. [Display omitted] •Deposit insurance is the most consistent indicator to measure banking regulation.•The mandate of the head of the supervisory agency is the key proxy for supervision.•Using capital ratio as a single proxy is not suitable for regulation assessment.•Optimal variable transformation is used to deal with variables of mixed measurement.•China’s regulation and supervision practices differ from most countries in the sample.