Why Do Countries Develop More Financially than Others?The Role of the Central Bank and Banking Supervision

Moneda y Credito, No. 216, 2003

80 Pages Posted: 5 Nov 2003 Last revised: 25 Aug 2009

Date Written: November 2003

Abstract

We construct a new measure of financial development, through multivariate analysis, which includes several indicators of financial size and efficiency for 134 countries. Based on this broad measure, we assess empirically the determinants of financial development focusing on two factors not yet explored in the literature, namely the central bank role and bank regulation and supervision; and we explore the differences between emerging and industrial countries. The results show that a relatively large involvement of the central bank in the financial system contributes to financial development in all countries, other things given. In the industrial country group, both broader central bank objectives and a large LOLR mandate are found to be beneficial. For emerging countries, the central bank involvement in the payment system, as well as broader central bank objectives, seem to enhance financial development. Finally, high quality regulation and supervision, particularly supervisory independence, is beneficial in industrial countries. As for emerging ones, supervisory independence only contributes to financial development if a relatively solid institutional framework is in place.

Keywords: Financial development, Financial Regulation and Supervision, Central Bank Objectives, Lender of Last Resort, Payment System

JEL Classification: G1O, G20, C23

Suggested Citation

Cuadro Sáez, Lucía and Gallego Herrero, Sonsoles and Garcia-Herrero, Alicia, Why Do Countries Develop More Financially than Others?The Role of the Central Bank and Banking Supervision (November 2003). Moneda y Credito, No. 216, 2003. Available at SSRN: https://ssrn.com/abstract=450400

Lucía Cuadro Sáez

Banco de España ( email )

Madrid 28014
Spain

Sonsoles Gallego Herrero

Banco de España ( email )

Madrid 28014
Spain

BBVA Research ( email )

C/ Azul,4. Edificio La Vela. Planta 4
Madrid, 28050
Spain

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium
Belgium

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