Identifying the key indicators of financial stability and financial development: a review of financial service sector (original) (raw)
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This research paper investigates the determinants of financial development. Credit to private sector is used as proxy of financial development in this study. Panel data from 1990 to 2012 on 27 developed and 30 developing countries has been used. The main interest of the research paper is to explore how different variables or indicators affect the credit to private sector as percentage of GDP (CPS) 1. The Hausman test is used to check weather fixed effect model is more appropriate or random effect model. Hausman test is in favor of Fixed Effect Model. The role of different important variables which effect the financial development have been found by using fixed effect model. It is concluded from empirical results that all exogenous variables except NFDI and RL have significant effect on financial development. Section I: Introduction The importance of financial development and economic growth have become more pronounced in recent years; in addition to other vital factors, the long term economic growth and welfare are correlated with the degree of financial development. There are different indicators to measure financial development such as size, depth, access, efficiency and stability of a financial system. The financial systems include markets, intermediaries, range of assets, institutions and regulations. A strong financial system guarantees the high capital accumulation (the rate of investment), trading, hedging, insurance services, diversified saving and portfolio choices etc. which facilitate and encourage the inflow of foreign capital and technological innovation. The greater financial development leads to poverty reduction, income inequality, mobilization of savings, better access of the poor to finance, high return investment, promotion of sound cooperate governance and enhancement of economic growth as well as welfare. The key importance of financial development and economic growth is generally acknowledged in the literature. However, the area of public sector borrowing from domestic banks and its impact on financial development and credit to private sector is still under-research. The public debt is often seen as a burden for both developing and developed countries. Since the early 1990s, there has been a fiscal improvement in both developing and developed countries due to restricted public debt; however, the fiscal adjustment in developed countries has been more noticeable than developing countries (World Economic Outlook, 2001). In recent years, the public debt in advanced countries has been falling while the emerging market countries do not follow the same trend. It is because advanced countries preferred to give credit to private sector than the public sector to avoid the crowding out situation. The crowding out situation limited the excess of private sector on credit from domestic banks both in developed and developing countries. The supply and demand of credit to the public and private sectors depends upon the macroeconomic conditions. If the level of public debt is high in the economy and macroeconomic variables indicate that the country's economic situation is vulnerable, domestic banks may be expected to prefer to finance public sector instead of private sector, which is more risky borrower. Thus, the private sector credit by the domestic banks may decline in such economies (IMF, Research Department, 2004), The credit to private sector is essential for the private investment and development in an economy. The domestic banks play a pivotal role in increasing employment, efficiency, productivity and inducing growth in an economy. However, in large emerging countries than advanced ones, the domestic banks mostly prefer to finance public sector to private sector. Thus, the private sector faces problems in finding credit for investment in form of crowding out systematically (Caballero and Krishnamurthy, 2004). The importance of financial sector cannot be denied as efficient financial system is a perquisite condition for 1 We use credit to private sector as percent of GDP (CPS) as proxy of financial development.
A survey of the determinants of financial development
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The positive effects of financial development on economic growth have encouraged researchers to study the determinants of financial development. Based on the theoretical and empirical studies undertaken, institutions, openness of trade and financial markets, legal tradition, and political economy are identified as factors promoting the financial system. Of these, political economy factors, which can have both direct and indirect effects through other determinants, could be considered the most influential factors in financial development. Variations in the political economy of countries could well explain variations in their financial development. Although all studies show the significant effects of these determinants on financial development, further research is needed to assess the impact of each determinant and the policies that could best promote financial development.
Financial development measurement: Comparison of the high- and low-income countries
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The literature that treats financial sector development and its impact on various economic phenomena does not recognise a single indicator of financial development measurement, nor do the various regulators of the financial sector have a single indicator to measure its development. Divergencies in financial development proxies used have prompted the International Monetary Fund (IMF) staff to create an indicator that includes all aspects of financial sector development (Čihák, Demirgüç-Kunt, Feyen, & Levine, 2012). The purpose of this paper is to show the main indicators of the financial development measurement and the gap between high- and low-income countries’ financial systems using the financial development index (FD index) developed by the IMF. This paper introduces the financial development indicator and uses it to compare different income group countries. The results show differences in the levels of financial development across countries. We also notice an improvement of the ...
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Financial development is often measured by financial depth such as the stock of private credit and market capitalization as a share of GDP. Such a measure focuses on the quantity aspect of financial development. In this paper, we propose measures that capture both the quantity and quality aspects of financial market development. For quantity measures, we construct a composite index with multiple variables which gauge the size and depth of the banking, equity, bond, and insurance markets. For quality measures, we create a composite index that reflects the degree of financial market diversity, liquidity and efficiency, and the institutional environment. The last factor captures the development of legal systems and institutions, human capital, and information and telecommunications infrastructure. We find that the quantity and quality measures are highly correlated with each another for advanced economies and Asian emerging market economies, but not for other economies. The disaggregat...
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The aim of this chapter is twofold: first, to present in the most proper manner the definition of financial development, considering that bad definition leads to bad measurement and taking into account the discussions in the literature. Second, it aims to discuss how to measure the level of financial development. In line with these objectives, financial development index values for 1998-2011 are calculated by principal components analysis for 77 countries considering the suitable indicator in terms of the right definition of financial development. The calculated indices helps to obtain a composite measure that evaluates the size, access, efficiency and stability dimensions of financial development together.
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Over the last two decades several countries experienced currency crises. These were characterized both by a huge disruption of economic activity and an extreme speed of diffusion within countries. The financial turmoil happened in a period of very high degree of international financial integration. As a result financial liberalization was associated with greater incidence of crises and this brought an intense debate in both academic and policy circles about the consequences of free capital movements. In this paper we aim to check the existence and the strength of credit channel and balance sheet effects in countries characterized by an intermediate level of financial development. A huge literature exists about the topic concerning the role that credit market and financial development play on the real activity. The paper empirically examines the dynamic relationship between financial development and economic growth. A time-series approach using the VAR Model has been used to provide an assessment of empirical evidence on the effects of financial development on macroeconomic volatility.
The association between financial development and economic development: A review
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Finance long has been described as the "governor" of economic development. Yet there are no agreed indicators of financial development or measures of the efficiency with which finance provides services to other sectors. This paper clarifies the choices by distinguishing price from quantity indicators of financial development. It recommends increased use of measures of spread between the required rate of return on productive investment and the rate of return on intermediated savings as soon as such data can be obtained from liberalized financial markets. For concreteness, data references are made to Mexico and Chile.
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Countries are classified under different group names because of their similarity to each other, and they are analyzed in that way by various international organizations. BRICS, MENA, G7 and Fragile Five are well known group names. In this study, the relationship between financial development and economic growth for Fragile five countries (Brazil, India, Indonesia, South Africa and Turkey) through the period of 2002-2016 were examined using annual data. In emerging market economies, businesses prefer to meet their financing needs by asking for credit from the capital market, mostly from banks and non-bank financial institutions. Therefore, it would not be wrong to say that financial system of Fragile Five countries is based on "lending financial institutions". Within the framework of the analysis, financial development index which includes three data related with credit provided by banks and financial institutions, and national income per capita as an economic growth variab...
FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH: PANEL CROSS - COUNTRY STUDY
This study aimed to examine the effect of financial development (FD) and private credit booms on economic growth. This study used the data of 58 countries (27 DCs and 31 LDCs), from the period 1973 to 2012, by applying the method of Panel Cointegration. This study involved the FD index made of four indicators of banking sector depth, activity, and efficiency indicators. The estimation results showed that LDCs gave more positively significant response to FD than DCs. This is because the LDCs' financial systems are dominantly Bank based or their banking sector is more developed than other institutions and markets. Whereas, the credit boom to private sector (which is taken as indicator of FD) inversely affect the economic growth rate. Such relation can be caused by lack of credit recovery, more defaulting loans, insolvency, and huge public debt, that hence leads to a financial crash like that of 2008 financial crisis.