Financial Sector Conditionality : Is Tougher Better?

The aim of this paper is to take a closer look at IMF conditionality in the banking sector. Our analysis shows that while such conditionality became more stringent following the Asian crisis, compliance has remained broadly unchanged, comparing unfavorably with other structural reforms. The results of panel data regressions show that while compliance with IMF-supported banking sector reform strategies has contributed to an improvement in banking sector performance, increases in the hardness and intensity of IMF conditionality may not be, ceteris paribus, effective. The policy implication is that the IMF should, therefore, continue its efforts in enhancing countries' ownership and streamlining conditionality.