Which commercial bank supervisory policies ease or intensify the degree to which bank
corruption is an obstacle to firms raising external finance? Based on new data from more than 2,500
firms across 37 countries, this paper provides the first empirical assessment of the impact of different
bank supervisory policies on firms%u2019 financing obstacles. We find that the traditional approach to bank
supervision, which involves empowering official supervisory agencies to directly monitor, discipline,
and influence banks, does not improve the integrity of bank lending. Rather, we find that a
supervisory strategy that focuses on empowering private monitoring of banks by forcing banks to
disclose accurate information to the private sector tends to lower the degree to which corruption of
bank officials is an obstacle to firms raising external finance. In extensions, we find that regulations
that empower private monitoring exert a particularly beneficial effect on the integrity of bank lending
in countries with sound legal institutions.
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