Financial sector development

About: Financial sector development is a research topic. Over the lifetime, 1674 publications have been published within this topic receiving 90787 citations.

Information Sharing and Financial Sector Development in Africa

Abstract: This study investigates the effect information sharing has on financial sector development in 53 African countries for the period 2004 to 2011. Information sharing is measured with private credit bureaus and public credit registries. Hitherto unexplored dimensions of financial sector development are employed, namely: financial sector dynamics of formalization, informalization, and non-formalization. The empirical evidence is based on Ordinary Least Squares (OLS) and Generalized Method of Moments (GMM). The following findings are established. Information-sharing bureaus increase (reduce) formal (informal/non-formal) financial sector development. In order to ensure that information-sharing bureaus improve (decrease) formal (informal/non-formal) financial development, public credit registries should have between 45.45 and 50% coverage while private credit bureaus should have at least 26.25% coverage.

Finance and Income Inequality: What Do the Data Tell Us?

Abstract: Although there are distinct conjectures about the relationship between finance and income inequality, little empirical research compares their explanatory power We examine the relationship between finance and income inequality for 83 countries between 1960 and 1995 Because financial develop ment might be endogenous, we use instruments from the literature on law, finance, and growth to control for this Our results suggest that, in the long run, inequality is less when financial development is greater, consistent with Galor and Zeira (1993) and Banerjee and Newman (1993) Although the results also suggest that inequality might increase as financial sector development increases at very low levels of financial sector development, as suggested by Greenwood and Jovanovic (1990), this result is not robust We reject the hypothesis that financial development benefits only the rich Our results thus suggest that in addition to improving growth, financial development also reduces inequality

Financial development, financial fragility, and growth

Abstract: This paper studies the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity. On the one hand, the empirical growth literature finds a positive effect of financial depth as measured by, for instance, private domestic credit and liquid liabilities (e.g., Levine, Loayza, and Beck 2000). On the other hand, the banking and currency crisis literature finds that monetary aggregates, such as domestic credit, are among the best predictors of crises and their related economic downturns (e.g., Kaminski and Reinhart 1999). The paper accounts for these contrasting effects based on the distinction between the short- and long-run impacts of financial intermediation. Working with a panel of cross-country and time-series observations, the paper estimates an encompassing model of short- and long-run effects using the Pooled Mean Group estimator developed by Pesaran, Shin, and Smith (1999). The conclusion from this analysis is that a positive long-run relationship between financial intermediation and output growth co-exists with a, mostly, negative short-run relationship. The paper further develops an explanation for these contrasting effects by relating them to recent theoretical models, by linking the estimated short-run effects to measures of financial fragility (namely, banking crises and financial volatility), and by jointly analyzing the effects of financial depth and fragility in classic panel growth regressions.

Introducing a New Broad-based Index of Financial Development

Abstract: There is a vast body of literature estimating the impact of financial development on economic growth, inequality, and economic stability. A typical empirical study approximates financial development with either one of two measures of financial depth – the ratio of private credit to GDP or stock market capitalization to GDP. However, these indicators do not take into account the complex multidimensional nature of financial development. The contribution of this paper is to create nine indices that summarize how developed financial institutions and financial markets are in terms of their depth, access, and efficiency. These indices are then aggregated into an overall index of financial development. With the coverage of 183 countries on annual frequency between 1980 and 2013, the database should offer a useful analytical tool for researchers and policy makers.

Foreign Banks in Poor Countries: Theory and Evidence

Abstract: We study how foreign bank penetration affects financial sector development in poor countries. A theoretical model shows that when domestic banks are better than foreign banks at monitoring soft information customers, foreign bank entry may hurt these customers and worsen welfare. The model also predicts that credit to the private sector should be lower in countries with more foreign bank penetration, and that foreign banks should have a less risky loan portfolio. In the empirical section, we test these predictions for a sample of lower income countries and find support for the theoretical model. IN RECENT YEARS MANY POOR COUNTRIES HAVE BEEN A LABORATORY of financial sector reform. A rigorous evaluation of these efforts is still work in progress, but available accounts suggest that key deficiencies have been difficult to resolve. 1 This paper studies how one aspect of financial sector reform, the entry of foreign banks, affects financial sector development in poor countries. Proponents of foreign banks claim that these banks can achieve better economies of scale and risk diversification than domestic banks, and that they introduce more advanced technology (especially risk management), import better supervision and regulation, and increase competition. Because they are backed by their parent banks, foreign affiliates of international banks may also be perceived as safer than private domestic banks, especially in times of economic difficulty. Last but not least, foreign banks may be less susceptible to political pressure and less inclined to lend to connected parties. Despite these advantages, critics point out that an important part of a bank’s business, namely, lending to informationally opaque firms, is inherently local in nature, and is not easily carried out by large organizations managed from ∗ Detragiache and Tressel are at the IMF. Gupta is at the Delhi School of Economics. The authors would like to thank an anonymous referee, Thorsten Beck, Stijn Claessens, Simon Johnson, Sole Martinez Peria, Raghu Rajan, Arvind Subramanian, and participants at the joint World Bank/IMF Seminar, the Paris School of Economics lunch seminar, the 2006 Annual Research Conference of the IMF, and the 2006 Financial Intermediation Research Society Conference for very helpful comments. We are also greatly indebted to Ugo Panizza and Monica Ya ˜ nez for sharing their data on bank ownership. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. 1 Comprehensive descriptions of financial sector structure, performance, and soundness for several poor countries are provided in the Financial Sector Stability Assessments (FSSAs), jointly carried out by the World Bank and the IMF. Most of these reports are available at www.imf.org.