## 1. Country Coverage of the Financial Reform Database

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### Introduction and purpose
- New database of financial reforms covering 91 economies over the period 1973–2005.
- Purpose: to document actual policy changes in multiple dimensions of financial reform to assess whether financial liberalization leads to more financial development, more stable financial systems, and better economic outcomes.
- Records financial policy changes along seven dimensions and combines category scores into a graded index normalized between zero and one.
- Earlier version covered 36 countries over 1973–96.

### Scope, grading, and timing (construction)
- Coverage: 91 economies, 1973–2005.
- Seven distinct dimensions of financial sector policy are coded.
- Each dimension is scored on a graded scale from zero to three:
  - zero = highest degree of repression
  - three = full liberalization
- Raw scores on different scales were normalized between 0 and 3 according to specified rules.
- Policy changes recorded as shifts in a country’s score on a given dimension in a given year; jumps of more than one unit are possible; reversals are recorded.
- Database described as a work in progress; country coverage and coding can be improved with feedback and extended coverage.

### The seven coded dimensions (issues and key thresholds)
- Credit controls and excessively high reserve requirements
  - Issues coded: minimum amounts of bank lending to “priority” sectors; ceilings on credit; directed credits at subsidized rates; ceilings on overall rate of expansion of credit; reserve requirement levels and remuneration.
  - Coding rule uses 20 percent as a threshold for determining whether reserve requirements are excessive.
- Interest rate controls
  - Issues coded: whether deposit and lending rates are administratively set; presence of floors, ceilings, or interest rate bands; full liberalization when all ceilings, floors or bands are eliminated.
- Entry barriers
  - Issues coded: restrictions on entry of new domestic banks, foreign banks, non-bank financial intermediaries; restrictions on scope of banks’ activities; geographic restrictions on bank operations; excessively restrictive licensing requirements.
- State ownership in the banking sector (Privatization)
  - Issues coded: share of banking sector assets controlled by state-owned banks.
  - Thresholds used to delineate grades: 50 percent, 25 percent and 10 percent.
- Capital account restrictions
  - Issues coded: multiple exchange rates, transactions taxes, and restrictions on inflows and/or outflows regarding financial credits.
- Prudential regulations and supervision of the banking sector
  - Greater government intervention is coded as a reform for this dimension.
  - Issues coded: adoption of risk-based capital adequacy ratios based on the Basle I capital accord; independence and legal power of banking supervisory agency; exemptions from supervisory oversight; effectiveness of on-site and off-site examinations.
- Securities market policy
  - Issues coded: auctioning of government securities; establishment and development of debt and equity markets; tax incentives; depository and settlement systems; openness of securities markets to foreign investors.

### Coding approach, judgment, and examples
- Coding relied heavily on expert assessments, IMF staff reports, FSAPs, central bank bulletins, websites, books, and journal articles.
- Appendix I contains detailed coding rules; Appendix II lists information sources.
- Examples preserved from source:
  - Portugal: deposit rates coded as fully liberalized in 1987 and lending rates as fully liberalized in 1988.
  - Argentina’s Deposit Nationalization Law of 1973 imposed a 100 percent reserve requirement (example of extreme case).
  - China: partial liberalization in lending rates in 2002 coded based on IMF reporting.
  - Interest-rate episode: parameter raised to “1.3 times the central lending rate. In Jan. 2004, it was raised again to 1.7.” Exact text preserved.

### Comparison to other measures and intended use
- Improves on most existing measures by providing graded, time-specific measures rather than binary dummies.
- Recognizes multi-faceted nature of financial reform across seven policy dimensions.
- Limitations noted:
  - Complexity of government intervention and difficulty retrieving information, especially for countries lacking detailed case studies.
  - Coding rules may not always capture the full extent of government influence on credit allocation.
  - Coverage could be increased to include more countries and more recent years.
- Authors welcome feedback to improve accuracy.
- Intended uses: empirically investigate effects of reform on financial sector outcomes (financial intermediation, allocative efficiency) and macroeconomic outcomes (growth, productivity, crisis vulnerability) to inform policy.

### Coding rules: selected highlights from Appendix I
- Aggregate index: eight (text notes eight in Appendix I overview) dimensions; raw scores normalized to 0-3 where fully liberalized = 3; partially liberalized = 2; partially repressed = 1; fully repressed = 0. Aggregate index gives equal weight to each dimension; sum ranges 0–21; normalized index ranges 0–1.
- I. Credit Controls and Reserve Requirements
  - Reserve requirements:
    - Coded 0 if reserve requirement is more than 20 percent.
    - Coded 1 if reserve requirements are reduced to 10–20 percent or regulations simplified as step toward reduction.
    - Coded 2 if reserve requirements are less than 10 percent.
  - Minimum credit to sectors:
    - Coded 0 if central bank determines credit allocations or mandatory allocations exist.
    - Coded 1 if mandatory credit allocations eliminated or do not exist.
  - Subsidized-rate credits:
    - Coded 0 when banks must supply credits at subsidized rates to certain sectors.
    - Coded 1 when mandatory subsidized credit requirement is eliminated.
  - Sum of three sub-scores mapped to category labels with explicit numeric brackets (e.g., Fully Liberalized = [4]).
- II. Aggregate Credit Ceilings
  - Coded 0 if ceilings on expansion of bank credit are in place.
  - Coded 1 if no restrictions exist on expansion of bank credit.
- III. Interest Rate Liberalization
  - Deposit and lending rates coded separately: government set or binding ceiling (code=0), fluctuating within a band (code=1), freely floating (code=2).
  - Composite mappings preserve exact notations (e.g., FL=4 [2, 2]; FR= 0 [0, 0]).
- IV. Banking Sector Entry
  - Sub-measures include foreign bank entry/equity, entry of new domestic banks, branching restrictions (0/1), range of bank activities (0/1).
  - Dimension coded by adding scores; Fully Liberalized = 4 or 5; Largely Liberalized = 3; Partially Repressed = 1 or 2; Fully Repressed = 0.
- V. Capital Account Transactions
  - Three binary items: unified exchange rate (0/1); restrictions on inflows (0/1); restrictions on outflows (0/1).
  - Sum mapped: Fully Liberalized = [3]; Largely Liberalized = [2]; Partially Repressed = [1]; Fully Repressed = [0].
- VI. Privatization
  - Mapped to share of public bank assets:
    - FL if public assets < 10 percent.
    - LL if public assets 10–25 percent.
    - PR if public assets 25–50 percent.
    - FR if public assets 50–100 percent.
- VII. Securities Markets (partial and expanded coding)
  - Initial coding: 0 if market does not exist; 1 when market starting to form; 2 when further measures taken (tax exemptions, introduction of medium and long-term government bonds, policies to develop corporate bond and equity markets).
  - Additional sub-dimensions:
    - Introduction of a primary dealer system; higher-stage coding (coded as 3 when further policy measures taken to develop derivative markets, deregulate portfolio investments and pension funds, or fully deregulate stock exchanges).
    - Equity market openness to foreign investors coded 0/1/2 by foreign ownership permission levels.
  - Aggregate classification by combining sub-dimensions: Fully Liberalized = [4 or 5]; Largely Liberalized = [3]; Partially Repressed = [1, 2]; Fully Repressed = [0].
  - If second sub-dimension missing, securities market-only information used to assign a 0-3 scale.

### Banking supervision: measured dimensions and coding rules
- Four dimensions summed; summed score mapped to degrees:
  - Highly Regulated = [6]
  - Largely Regulated = [4-5]
  - Less Regulated = [2-3]
  - Not Regulated = [0-1]
- 1) Adoption of Basle-based capital adequacy ratio (0/1)
  - Coded 1 when Basle CAR is in force; prior to 1993 this measure takes value 0.
- 2) Independence of banking supervisory agency (0/1/2)
  - Coded 0 where agency lacks legal framework, is under MOF jurisdiction, or experiences frequent turnover.
  - Coded 1 where objectives/legal framework exist but independence issues remain.
  - Coded 2 where agency is legally independent and not interfered with by executive branch.
- 3) Effectiveness of on-site and off-site examinations (0/1/2)
  - Coded 0 when no legal framework or examinations not conducted.
  - Coded 1 when legal framework exists and examinations conducted but ineffective.
  - Coded 2 when examinations are effective and sophisticated.
- 4) Coverage: supervisory coverage of all financial institutions (0/1)
  - Coded 1 when all banks are under supervision without exception; coded 0 otherwise.

### Descriptive statistics and sample coverage (key numeric findings)
- Database covers 91 economies; time coverage mainly from 1975 to 2005 within 1973–2005 span.
- Regional composition of 91 economies:
  - 16 from South Asia and East Asia
  - 17 from Latin America and the Caribbean
  - 14 from Sub-Saharan Africa
  - 5 from the Middle East or North Africa
  - 15 Western European countries
  - 9 former Soviet Union countries
  - remainder: a few other European countries plus Australia, Canada, New Zealand and the U.S.
- Classification: financial systems on average most liberalized in interest rate controls, bank entry, and capital account restrictions; bank supervision and regulation lagged.
- Correlations (Table 3a levels; Table 3b changes) — selected exact pairwise correlations:
  - Levels:
    - Credit Controls with Interest Rate Controls 0.651
    - Credit Controls with Securities Market 0.624
    - Capital Account with Securities Market 0.676
    - Interest Rate Controls with Capital Account 0.606
    - Bank Regulations with Securities Market 0.642
  - Changes (pairwise correlations of changes):
    - Credit Controls with Interest Rate Controls 0.148
    - Credit Controls with Entry Barriers 0.030
    - Capital Account with Securities Market 0.117
    - Interest Rate Controls with Bank Regulations -0.002
- Aggregate index construction:
  - Seven dimensions normalized to 0-3; sum therefore takes values between 0 and 21.
- Table 2 summary statistics (Number of Observations = 2671):
  - Credit Controls: Mean 1.591; Standard Deviation 1.111; Minimum 0; Maximum 3
  - Interest Rate Controls: Mean 1.778; Standard Deviation 1.324; Minimum 0; Maximum 3
  - Entry Barriers: Mean 1.769; Standard Deviation 1.179; Minimum 0; Maximum 3
  - Bank Regulation and Supervision: Mean 0.776; Standard Deviation 0.958; Minimum 0; Maximum 3
  - Privatization: Mean 1.248; Standard Deviation 1.187; Minimum 0; Maximum 3
  - Capital Account: Mean 1.668; Standard Deviation 1.135; Minimum 0; Maximum 3
  - Securities Market: Mean 1.490; Standard Deviation 1.129; Minimum 0; Maximum 3
  - Financial Reform Index: Mean 10.321; Standard Deviation 6.333; Minimum 0; Maximum 21
  - Financial Reform Index (normalized): Mean 0.491; Standard Deviation 0.302; Minimum 0; Maximum 1

### Distribution and temporal patterns of policy change
- Classification of yearly policy-change magnitudes:
  - Decrease by 3 or more points = large reversal.
  - Decrease by 1 or 2 points = reversal.
  - Increase by 1 or 2 points = reform.
  - Increase by 3 or more points = large reform.
  - No change = status quo.
- Distribution of policy changes (Table 4 — Full Sample):
  - Large Reversal 0.50
  - Reversal 4.42
  - Status Quo 65.16
  - Reform 24.65
  - Large Reform 5.27
  - Total 100
- By region (selected exact percentages from Table 4):
  - Advanced Economies: Status Quo 73.15; Reform 20.60; Large Reform 4.40
  - Latin America and Caribbean: Large Reversal 1.65; Reversal 7.72; Status Quo 59.19; Reform 24.26; Large Reform 7.17
  - Transition Economies: Status Quo 45.24; Reform 39.29; Large Reform 10.32
- Stylized temporal patterns:
  - Most reforms concentrated in the first half of the 1990s; liberalization peaked in 1995 and slowed thereafter.
  - Latin America: most reforms in late 1980s and early 1990s; early reforms in Argentina and Chile in the 1970s; reversals during the debt crisis of 1982–83.
  - East Asia: gradual reforms from early 1980s over a decade or more; 1997 crisis led to slight decline in the reform index but no sharp reversals.
  - South Asia: very repressed until mid to late 1980s; steady reforms since then.
  - Sub-Saharan Africa: liberalization accelerated sharply in the 1990s, most intense between 1993 and 1997; Kenya and Nigeria experienced reversals; after 1998 liberalization slowed and reversals occurred in Kenya, Uganda, and Zimbabwe.
  - Transition countries: fastest episodes of liberalization; by 2002 had almost closed the gap with Latin America and East Asia.
  - Five OECD countries (Canada, Germany, the Netherlands, the United Kingdom, and the United States) already had liberalized financial sectors at the beginning of the sample period.
  - New Zealand adopted a one-shot approach with most reforms in 1984–86.
- Around 30 percent of the sample country/years saw some change; status quo observations represent over 65 percent of the whole sample.

### Degree of liberalization by component and region (Average 2005; components range between 0 and 3)
- Full Sample (2005 averages):
  - Credit Controls 2.374
  - Interest Rate Controls 2.725
  - Entry Barriers 2.725
  - Bank Regulations 1.978
  - Privatization 2.000
  - Capital Account 2.363
  - Securities Market 2.253
- Advanced Economies (2005 averages):
  - Credit Controls 2.784
  - Interest Rate Controls 3.000
  - Entry Barriers 3.000
  - Bank Regulations 2.636
  - Privatization 2.409
  - Capital Account 3.000
  - Securities Market 3.000
- Sub-Saharan Africa (2005 averages):
  - Credit Controls 2.304
  - Interest Rate Controls 2.429
  - Entry Barriers 2.714
  - Bank Regulations 1.500
  - Privatization 2.357
  - Capital Account 1.500
  - Securities Market 1.571
- Noted pattern: bank regulation and privatization are among the least advanced dimensions across many groupings; regulatory and supervisory reforms often followed the first wave of financial reforms and remain relatively less advanced many years after initial liberalization.

### Country coverage and information sources (Appendix II)
- Table 1 lists country coverage (sample includes Albania; Algeria; Argentina; Australia; Austria; Azerbaijan; Bangladesh; Belarus; Belgium; Bolivia; Brazil; Bulgaria; Burkina-Faso; Cameroon; Canada; Chile; China; Colombia; Costa Rica; Côte d'Ivoire; Czech Republic; Denmark; Dominican Republic; Ecuador; Egypt; El Salvador; Estonia; Ethiopia; Finland; France; Georgia; Germany; Ghana; Greece; Guatemala; Hong Kong; Hungary; India; Indonesia; Ireland; Israel; Italy; Jamaica; Japan; Jordan; Kazakhstan; Kenya; Korea; Kyrgyz Republic; Latvia; Lithuania; Madagascar; Malaysia; Malta (not listed if absent — only use listed entries); Mexico; Morocco; Mozambique; Nepal; Netherlands; New Zealand; Nicaragua; Nigeria; Norway; Pakistan; Paraguay; Peru; Philippines; Poland; Portugal; Romania; Russia; Senegal; Serbia (not listed unless present); Singapore; Slovenia (not listed unless present); South Africa; Spain; Sri Lanka; Sweden; Switzerland; Taiwan; Tanzania; Thailand; Tunisia; Turkey; Uganda; Ukraine; United Kingdom; United States; Uruguay; Uzbekistan; Venezuela; Vietnam; Zimbabwe).
- Bibliographic and data sources include a wide range of books, working papers, IMF papers, BIS papers, World Bank reports, journal articles, and web resources (representative entries preserved in Appendix II).

### Conclusions and research potential
- Financial sector development is linked to positive impacts on growth, productivity, and poverty reduction.
- Research gap: less clarity on how best to achieve financial sector development and which policies most effectively foster it.
- Dataset assembled: large cross-country dataset on financial sector policies covering 91 countries over 1973–2005; multi-faceted and graded measure intended to support empirical investigation.
- Objective: use the database to provide more concrete policy prescriptions to deliver gains associated with financial sector development.

*Source: _wp08266 (excerpts provided).*

### 1. Country Coverage of the Financial Reform Database................................................. 24

### 1. Country Coverage of the Financial Reform Database................................................. 24

### Introduction
- The paper introduces a new database of financial reforms covering 91 economies over the period 1973–2005.
- Purpose: to document actual policy changes in multiple dimensions of financial reform to help answer whether financial liberalization leads to more financial development, more stable financial systems, and better economic outcomes.
- The database records financial policy changes along seven dimensions and combines category scores into a graded index normalized between zero and one.
- An earlier version of the database covered 36 countries over the period 1973–96.

### Construction of the database: scope, grading, and timing
- Coverage: 91 economies, 1973–2005.
- Seven distinct dimensions of financial sector policy are coded.
- Each dimension is scored on a graded scale from zero to three:
  - zero = highest degree of repression
  - three = full liberalization
- A raw score was first assigned to each dimension on different scales, then each raw score was normalized between 0 and 3 according to a rule.
- Policy changes are recorded as shifts in a country’s score on a given dimension in a given year; jumps of more than one unit are possible when multiple measures change simultaneously. Reversals (shifts from a higher to a lower score) are recorded.
- The database is described as a work in progress; country coverage and coding could be improved with feedback and extended coverage.

### The seven dimensions (questions guiding coding)
- Credit controls and excessively high reserve requirements
  - Issues coded: minimum amounts of bank lending to “priority” sectors; ceilings on credit; directed credits at subsidized rates; ceilings on overall rate of expansion of credit; reserve requirement levels and remuneration.
  - Coding rule uses 20 percent as a threshold for determining whether reserve requirements are excessive.
- Interest rate controls
  - Issues coded: whether deposit and lending rates are administratively set; presence of floors, ceilings, or interest rate bands; full liberalization when all ceilings, floors or bands are eliminated.
- Entry barriers
  - Issues coded: restrictions on entry of new domestic banks, foreign banks, non-bank financial intermediaries; restrictions on scope of banks’ activities; geographic restrictions on bank operations; excessively restrictive licensing requirements.
- State ownership in the banking sector
  - Issues coded: share of banking sector assets controlled by state-owned banks.
  - Thresholds used to delineate grades: 50 percent, 25 percent and 10 percent.
- Capital account restrictions
  - Issues coded: multiple exchange rates, transactions taxes, and restrictions on inflows and/or outflows regarding financial credits.
- Prudential regulations and supervision of the banking sector
  - Unique among the seven dimensions: greater government intervention is coded as a reform.
  - Issues coded: adoption of risk-based capital adequacy ratios based on the Basle I capital accord; independence and legal power of banking supervisory agency; exemptions from supervisory oversight; effectiveness of on-site and off-site examinations.
- Securities market policy
  - Issues coded: auctioning of government securities; establishment and development of debt and equity markets; tax incentives; depository and settlement systems; openness of securities markets to foreign investors.

### Coding approach, judgment, and examples
- Coding relied heavily on expert assessments where possible; IMF staff reports, FSAPs, central bank bulletins, websites, books, and journal articles were important sources.
- Appendix I contains detailed coding rules; Appendix II lists information sources.
- Example: Portugal interest rate liberalization — IMF reports used to code deposit rates as fully liberalized in 1987 and lending rates as fully liberalized in 1988.
- Example threshold cited: Argentina’s Deposit Nationalization Law of 1973 imposed a 100 percent reserve requirement (example of extreme case mentioned in description).
- The database records partial liberalizations and uses judgment calls for complex cases (e.g., partial liberalization in China for lending rates in 2002 based on IMF reporting).

### Comparisons, limitations, and intended use
- The database improves on most existing measures by providing graded, time-specific measures rather than binary dummies, allowing more precise determination of magnitude and timing of policy changes.
- The database recognizes the multi-faceted nature of financial reform and attempts to capture reforms across seven distinct policy dimensions.
- Limitations noted:
  - Complex nature of government intervention and difficulty retrieving information, especially for countries lacking detailed case studies.
  - Coding rules may not always accurately capture the extent of government influence on credit allocation.
  - Coverage could be increased to include more countries and more recent years.
- The authors welcome feedback on both construction and country-specific coding to improve accuracy.

*Source: _wp08266 - 1. Country Coverage of the Financial Reform Database................................................. 24*

### 1.3 times the central lending rate. In Jan. 2004, it was raised again to 1.7.” Interest rates on loans

### _wp08266 - 1.3 times the central lending rate. In Jan. 2004, it was raised again to 1.7.” Interest rates on loans

### Interest rate liberalization and loan/deposit rate reform
- Interest rates on loans were coded as fully liberalized in 2004.
- Deposit rates were coded as partially liberalized in 2002.
- Source text: “On Oct. 29, 2004, the ceiling on lending rates was scrapped altogether (except for urban and rural credit cooperatives). Along with the liberalization of lending rates, banks were given more freedom to make downward adjustments to deposit rates.”
- In an earlier episode referenced in the content unit, a policy change was described as raising a parameter to “1.3 times the central lending rate. In Jan. 2004, it was raised again to 1.7.” (text preserved exactly as supplied).

### Coding of competition and country-specific treatment
- Coding of the competition dimension sometimes required country-specific knowledge.
- Spain: banking system dominated by savings banks; branching restrictions were lifted for commercial banks in the early 1980s, but coded as liberalized in 1992 when savings banks were allowed to open branches anywhere.
- China: coded as non-liberalized in light of restrictions for a subset of commercial banks.
- Footnote on bank types: “Joint-stock commercial banks (JSCB) are partially owned by local governments and state owned enterprises, and sometimes by the private sector. They are generally allowed to operate at the national level. City commercial banks are not allowed to operate at the national or regional scale unlike the JSCBs, which is their major competitive disadvantage.” (Garcia-Herrero and others, 2005)

### Comparison to other financial liberalization databases
- Edison and Warnock (2003): measure proportion of total stock market capitalization available to foreign investors for 29 emerging markets from 1989–2000; graded over time but narrowly focused on capital controls in portfolio equity investment.
- Williamson and Mahar (1998): record financial reforms in 34 economies over 1973–96 across six graded dimensions (credit controls, interest rate controls, entry barriers, regulations, privatization and international capital flows); closer in scope to the present measure.
- Kaminsky and Schmukler (2003): graded index with three components (domestic financial sector liberalization, capital account liberalization, openness of equity market to foreign investment); component values take discrete values “fully liberalized,” “partially liberalized,” or “repressed.” Time coverage 1973–99; sample covers 28 countries (14 developed and 14 developing countries) versus 91 countries in this database. Their measure places more weight on capital flow liberalization; the present database emphasizes domestic financial sector reforms.
- Bandiera and others (2000) and Laeven (2003): characterize financial liberalization along six dimensions but with smaller country coverage (8 and 13 countries, respectively) and binary (non-graded) components.
- Despite construction differences, all datasets show similar broad patterns of financial sector reform.

### Descriptive statistics and sample coverage
- Database covers 91 economies.
- Regional composition of the 91 economies:
  - 16 from South Asia and East Asia
  - 17 from Latin America and the Caribbean
  - 14 from Sub-Saharan Africa
  - 5 from the Middle East or North Africa
  - 15 Western European countries
  - 9 former Soviet Union countries
  - remainder: a few other European countries plus Australia, Canada, New Zealand and the U.S.
- Time coverage: period of over 30 years, mainly from 1975 to 2005.
- According to the authors’ classification, financial systems were on average most liberalized in interest rate controls, bank entry, and capital account restrictions; bank supervision and regulation lagged behind.
- Correlations:
  - Most components are highly correlated (Table 3a).
  - Annual changes in component indexes are much less correlated (Table 3b).
  - High binary correlations: interest rate and credit control liberalization; securities markets reforms and capital account liberalization; interest rate deregulation and capital account liberalization.
  - Changes in bank privatization have very low correlation with other reform dimensions.
- Aggregate index construction:
  - Seven dimensions, each normalized to 0-3; sum therefore takes values between 0 and 21.
  - Credit control component normalized to take values between 0 and 3.
- Stylized patterns:
  - Financial reforms advanced substantially through much of the sample period.
  - Higher-income economies remained more liberalized than lower-income economies throughout.
  - Individual country reform process characterized by long periods of status quo.
- Classification of yearly policy-change magnitudes:
  - Decrease by 3 or more points = large reversal.
  - Decrease by 1 or 2 points = reversal.
  - Increase by 1 or 2 points = reform.
  - Increase by 3 or more points = large reform.
  - No change = status quo.
- Distribution of policy changes (Table 4):
  - Status quo observations represent over 65 percent of the whole sample.
  - Reversals (about 5 percent of observations), especially large ones, are relatively rare.
  - Reforms constitute another 25 percent of the sample.
  - Large reforms account for another 5 percent.
  - Around 30 percent of the sample country/years saw some change.
- Temporal and regional patterns:
  - Most reforms concentrated in the first half of the 1990s; liberalization peaked in 1995 and slowed thereafter.
  - Latin America: most reforms occurred in late 1980s and early 1990s, with early reforms in Argentina and Chile in the 1970s and reversals during the debt crisis of 1982–83.
  - East Asia: gradual reforms from early 1980s over a decade or more; 1997 crisis led to a slight decline in the reform index but no sharp reversals.
  - South Asia: remained very repressed until mid to late 1980s; steady reforms since then.
  - Sub-Saharan Africa: liberalization accelerated sharply in the 1990s, most intense between 1993 and 1997; Kenya and Nigeria experienced reversals; after 1998 liberalization slowed and reversals occurred in Kenya, Uganda, and Zimbabwe.
  - Transition countries: fastest episodes of liberalization; by 2002 had almost closed the gap with Latin America and East Asia.
  - Five OECD countries (Canada, Germany, the Netherlands, the United Kingdom, and the United States) already had liberalized financial sectors at the beginning of the sample period.
  - Other OECD countries in the sample began with relatively repressed systems but gradually liberalized beginning in the late 1970s and early 1980s.
  - New Zealand adopted a one-shot approach with most reforms in 1984–86.

### Degree of liberalization by dimension and region (end of sample period)
- Table 6 findings summarized:
  - Bank regulation and privatization are the least advanced dimensions in the sample as a whole and in many groupings, including Advanced countries, Emerging and Developing Asia, Transition Economies, and the Middle-East and North Africa.
  - In the Middle-East and North Africa region, capital account liberalization also lagged behind other reforms in 2005.
  - In Sub-Saharan Africa, securities market reforms, capital account liberalization, and measures to improve bank regulation remained behind other regions, while liberalization of entry barriers was quite advanced.
- Regulatory and supervisory reforms often followed the first wave of financial reforms; regulatory and supervisory reforms remain relatively less advanced even many years after the beginning of financial reforms.

### Conclusions and research potential
- Importance: financial sector to growth and development is well established; greater financial sector development found to have positive causal impact on growth, productivity, and poverty reduction.
- Research gap: less clear how best to achieve financial sector development and to what extent policies can foster financial development.
- Dataset assembled: large cross-country dataset on financial sector policies covering 91 countries over the 1973-2005 period; multi-faceted and graded measure.
- Uses: empirically investigate effects of reform on financial sector outcomes (increased financial intermediation, improved allocative efficiency) and macroeconomic outcomes (growth, productivity, crisis vulnerability).
- Objective: hope that the database and ensuing research can help provide more concrete policy prescriptions to deliver gains associated with financial sector development.

### Appendix I. Coding rules (overview)
- Index constructed from eight dimensions; codes assigned along dimensions and subdimensions; raw scores normalized to a 0-3 scale where fully liberalized = 3; partially liberalized = 2; partially repressed = 1; fully repressed = 0.
- Aggregate index: equal weight to each dimension; example given mapping a raw credit-controls score of 4 to Fully Liberalized = 3 on 0-3 scale.

I. Credit Controls and Reserve Requirements
- Three sub-questions and coding rules:
  1) Are reserve requirements restrictive?
     - Coded as 0 if reserve requirement is more than 20 percent.
     - Coded as 1 if reserve requirements are reduced to 10–20 percent or complicated regulations to set reserve requirements are simplified as a step toward reducing reserve requirements.
     - Coded as 2 if reserve requirements are less than 10 percent.
  2) Are there minimum amounts of credit that must be channeled to certain sectors?
     - Coded as 0 if credit allocations are determined by the central bank or mandatory credit allocations to certain sectors exist.
     - Coded as 1 if mandatory credit allocations to certain sectors are eliminated or do not exist.
  3) Are there any credits supplied to certain sectors at subsidized rates?
     - Coded as 0 when banks have to supply credits at subsidized rates to certain sectors.
     - Coded as 1 when the mandatory requirement of credit allocation at subsidized rates is eliminated or banks do not have to supply credits at subsidized rates.
- Sum of three scores coded as:
  - Fully Liberalized = [4]
  - Largely Liberalized = [3]
  - Partially Repressed = [1,2]
  - Fully Repressed = [0]

II. Aggregate Credit Ceilings
- Coded as 0 if ceilings on expansion of bank credit are in place (including bank-specific credit ceilings imposed by central bank).
- Coded as 1 if no restrictions exist on the expansion of bank credit.

III. Interest Rate Liberalization
- Deposit rates and lending rates considered separately; each coded as government set or subject to a binding ceiling (code=0), fluctuating within a band (code=1) or freely floating (code=2).
- Composite mappings (preserving exact notation):
  - FL=4 [2, 2] Fully Liberalized if both deposit interest rates and lending interest rates are determined at market rates.
  - LL = 3 [2, 1] Largely Liberalized when either deposit rates or lending rates are freed but the other rates are subject to band or only a part of interest rates are determined at market rates.
  - PR= 2/1 [2, 0] [1, 1][1, 0] Partially Repressed when either deposit rates or lending rates are freed but the other interest rates are set by government or subject to ceiling/floor; or both deposit rates and lending rates are subject to band or partially liberalized; or either deposit rates or lending rates are subject to band or partially liberalized.
  - FR= 0 [0, 0] Fully Repressed when both deposit rates and lending rates are set by the government or subject to ceiling/floor.

IV. Banking Sector Entry
- Sub-measures and coding:
  1) Foreign bank entry and equity ownership:
     - Coded as 0 when no entry of foreign banks is allowed; or tight restrictions on the opening of new foreign banks are in place.
     - Coded as 1 when foreign bank entry is allowed, but nonresidents must hold less than 50 percent equity share.
     - Coded as 2 when the majority of share of equity ownership of domestic banks by nonresidents is allowed; or equal treatment is ensured for both foreign banks and domestic banks; or an unlimited number of branching is allowed for foreign banks.
  2) Entry of new domestic banks:
     - Coded as 0 when the entry of new domestic banks is not allowed or strictly regulated.
     - Coded as 1 when the entry of new domestic banks or other financial institutions is allowed into the domestic market.
  3) Restrictions on branching (0/1):
     - Coded as 0 when branching restrictions are in place.
     - Coded as 1 when there are no branching restrictions or if restrictions are eased.
  4) Range of bank activities (0/1):
     - Coded as 0 when the range of activities that banks can take consists of only banking activities.
     - Coded as 1 when banks are allowed to become universal banks.
- Dimension of entry barriers coded by adding the scores of these three questions:
  - Fully Liberalized = 4 or 5
  - Largely Liberalized = 3
  - Partially Repressed = 1 or 2
  - Fully Repressed = 0

V. Capital Account Transactions
- Three items and coding:
  1) Is the exchange rate system unified? (0/1)
     - Coded as 0 when a special exchange rate regime for either capital or current account transactions exists.
     - Coded as 1 when the exchange rate system is unified.
  2) Restrictions on capital inflow? (0/1)
     - Coded as 0 when significant restrictions exist on capital inflows.
     - Coded as 1 when banks are allowed to borrow from abroad freely without restrictions and there are no tight restrictions on other capital inflows.
  3) Restrictions on capital outflow? (0/1)
     - Coded as 0 when restrictions exist on capital outflows.
     - Coded as 1 when capital outflows are allowed to flow freely or with minimal approval restrictions.
- By adding the three items:
  - Fully Liberalized = [3]
  - Largely Liberalized = [2]
  - Partially Repressed = [1]
  - Fully Repressed = [0]

VI. Privatization
- Coding:
  - FL: Fully Liberalized if no state banks exist or state-owned banks do not consist of any significant portion of banks and/or the percentage of public bank assets is less than 10 percent.
  - LL: Largely Liberalized if most banks are privately owned and/or the percentage of public bank assets is from 10 percent to 25 percent.
  - PR: Partially Repressed if many banks are privately owned but major banks are still state-owned and/or the percentage of public bank assets is 25–50 percent.
  - FR: Fully Repressed if major banks are all-state owned banks and/or the percentage of public bank assets is from 50 percent to 100 percent.

VII. Securities Markets (partial)
- Question: Has a country taken measures to develop securities markets?
  - Coded as 0 if a securities market does not exist.
  - Coded as 1 when a securities market is starting to form with the introduction of auctioning of T-bills or the establishment of a security commission.
  - Coded as 2 when further measures have been taken to develop securities markets (tax exemptions, introduction of medium and long-term government bonds in order to build the benchmark of a yield curve, policies to develop corporate bond and equity markets, or the [text continues in source]).

*Source: _wp08266 (excerpts provided).*

### introduction of a primary dealer system to develop government security markets).

### _wp08266 - introduction of a primary dealer system to develop government security markets)

### Securities market liberalization: measurement dimensions and coding
- Two sub-dimensions added to measure securities market liberalization:
  - Introduction of a primary dealer system to develop government security markets.
    - Coded as 3 when further policy measures have been taken to develop derivative markets or to broaden the institutional investor base by deregulating portfolio investments and pension funds, or completing the full deregulation of stock exchanges.
  - Is a country’s equity market open to foreign investors?
    - Coded as 0 if no foreign equity ownership is allowed.
    - Coded as 1 when foreign equity ownership is allowed but there is less than 50 percent foreign ownership.
    - Coded as 2 when a majority equity share of foreign ownership is allowed.
- Aggregate classification by combining the two sub-dimensions:
  - Fully Liberalized = [4 or 5]
  - Largely Liberalized = [3]
  - Partially Repressed = [1, 2]
  - Fully Repressed = [0]
- NOTE on missing sub-dimension data:
  - If information on the second sub-dimension was not available (as is the case with some low-income countries), the measure was coded using information on securities market development.
  - If information on securities markets only was considered, a 0-3 scale was assigned based on the score on securities markets.

### Banking sector supervision: four measured dimensions and coding rules
- Overview:
  - Enhancement of banking supervision over the banking sector is coded by summing up four dimensions. The summed score is assigned reform degrees as:
    - Highly Regulated = [6]
    - Largely Regulated = [4-5]
    - Less Regulated = [2-3]
    - Not Regulated = [0-1]

- 1) Adoption of a Basle-based capital adequacy ratio (0/1)
  - Coded as 0 if the Basle risk-weighted capital adequacy ratio is not implemented. Date of implementation is important, in terms of passing legislation to enforce the Basle requirement of 8 percent CAR.
  - Coded as 1 when Basle CAR is in force.
  - Note: If the large majority of banks meet the prudential requirement of an 8 percent risk-weighted capital adequacy ratio, but this is not a mandatory ratio as in Basle, the measure is still classified as 1.
  - Prior to 1993, when the Basle regulations were not in place internationally, this measure takes the value of 0.

- 2) Independence of the banking supervisory agency from executive influence (0/1/2)
  - Conceptual basis:
    - Independence is ensured when the supervisory agency can resolve banks’ problems without delays; delays often stem from lack of autonomy caused by political interference (for example, requiring approval from the Minister of Finance (MOF) to revoke or suspend licenses, or ultimate jurisdiction of supervision lying with the MOF).
    - Independence also requires sufficient power to resolve bank problems promptly.
  - Coding rules:
    - Coded as 0 when:
      - the banking supervisory agency does not have an adequate legal framework to promptly intervene in banks’ activities; and/or
      - there is a lack of legal framework for the independence of the supervisory agency such as the appointment and removal of the head of the banking supervisory agency; or
      - the ultimate jurisdiction of the banking supervision is under the MOF; or
      - a frequent turnover of the head of the supervisory agency is experienced.
    - Coded as 1 when:
      - the objective supervisory agency is clearly defined and an adequate legal framework to resolve banking problems is provided (the revocation and the suspension of authorization of banks, liquidation of banks, and the removal of banks’ executives etc.) but potential problems remain concerning the independence of the banking supervisory agency (for example, when the MOF may intervene into the banking supervision in such as case that the board of the banking supervisory agency board is chaired by the MOF, although the fixed term of the board is ensured by law); or although clear legal objectives and legal independence are observed, the adequate legal framework for resolving problems is not well articulated.
    - Coded as 2 when:
      - a legal framework for the objectives and the resolution of troubled banks is set up and if the banking supervisory agency is legally independent from the executive branch and actually not interfered with by the executive branch.
  - Footnote context (methodology and measurement challenges):
    - Independence in this dataset is measured by combining institutional independence and supervisory independence.
    - Legal documents for banking supervision are less available and obtaining information on turnover of the head of the banking supervisory agency is difficult; coding relied on experts or researchers’ evaluation.

- 3) Effectiveness of on-site and off-site examinations (0/1/2)
  - Rationale:
    - Conducting on-site and off-site examinations of banks is an important way to monitor banks’ balance sheets.
  - Coding rules:
    - Coded as 0 when a country has no legal framework and practices of on-site and off-site examinations is not provided or when no on-site and off-site examinations are conducted.
    - Coded as 1 when the legal framework of on-site and off-site examinations is set up and the banking supervision agency have conducted examinations but in an ineffective or insufficient manner.
    - Coded as 2 when the banking supervisory agency conducts effective and sophisticated examinations.

- 4) Coverage: Does the banking supervisory agency cover all financial institutions without exception? (0/1)
  - Rationale:
    - If some kinds of banks are not exclusively supervised by the banking supervisory agency or if offshore intermediaries of banks are excluded from the supervision, the effectiveness of the banking supervision is seriously undermined.
  - Coding rules:
    - Coded as 1 when all banks are under supervision by supervisory agencies without exception.
    - Coded as 0 if some kinds of financial institutions are not exclusively supervised by the banking supervisory or are excluded from banking supervisory agency oversights.

*Source: _wp08266 - introduction of a primary dealer system to develop government security markets).*

### APPENDIX II. INFORMATION SOURCES

### _wp08266 - APPENDIX II. INFORMATION SOURCES

### Bibliographic and data sources
- Extensive list of books, working papers, IMF papers, BIS papers, World Bank reports, journal articles, and web resources used to compile the Financial Reform Database. Representative entries include:
  - Ariyoshi, Akira et al., 2000, “Capital Controls: Country Experiences with Their Use and Liberalization.” IMF Occasional Paper No.190.
  - Bandiera, Oriana et al., 2000, “Does Financial Reform Raise or Reduce Saving?” Review of Economics and Statistics, Vol. 82, pp. 239–63.
  - Bank for International Settlements, 2002, “The Development of Bond Markets in Emerging Economies,” BIS Papers No. 11.
  - Caprio, Gerard; Honohan, Patrick; Stiglitz, Joseph E., eds., 2001, Financial Liberalization: How Far, How Fast?
  - Lindgren, Carl-Johan et al., 1999, Financial Sector Crisis and Restructuring Lessons from Asia, IMF Occasional Paper No. 188.
  - World Bank, 1995, The Emerging Asian Bond Market.
- Country- and region-specific coverage cited across the sources includes Argentina, Brazil, Chile, China, Colombia, India, Kenya, Malaysia, Peru, Romania, Russia, Spain, Thailand, Venezuela, Chile, Ghana, Indonesia, Korea, Mexico, Turkey, Zimbabwe, and many others referenced in individual works.
- Web-based and dataset sources cited include country risk chronologies and privatization listings (e.g., http://www.duke.edu/~charvey/Country_risk/couindex.htm and http://www.privatizationlink.com/).

### Table 1 — Country coverage of the Financial Reform Database
- Country list (as presented): Albania; Algeria; Argentina; Australia; Austria; Azerbaijan; Bangladesh; Belarus; Belgium; Bolivia; Brazil; Bulgaria; Burkina-Faso; Cameroon; Canada; Chile; China; Colombia; Costa Rica; Côte d'Ivoire; Czech Republic; Denmark; Dominican Republic; Ecuador; Egypt; El Salvador; Estonia; Ethiopia; Finland; France; Georgia; Germany; Ghana; Greece; Guatemala; Hong Kong; Hungary; India; Indonesia; Ireland; Israel; Italy; Jamaica; Japan; Jordan; Kazakhstan; Kenya; Korea; Kyrgyz Republic; Latvia; Lithuania; Madagascar; Malaysia; Malta (not listed if absent — only use listed entries); Mexico; Morocco; Mozambique; Nepal; Netherlands; New Zealand; Nicaragua; Nigeria; Norway; Pakistan; Paraguay; Peru; Philippines; Poland; Portugal; Romania; Russia; Senegal; Serbia (not listed unless present); Singapore; Slovenia (not listed unless present); South Africa; Spain; Sri Lanka; Sweden; Switzerland; Taiwan; Tanzania; Thailand; Tunisia; Turkey; Uganda; Ukraine; United Kingdom; United States; Uruguay; Uzbekistan; Venezuela; Vietnam; Zimbabwe.
- (Country names appear in tabular layout across pages 24–25 of the source.)

### Table 2 — Summary statistics for Financial Liberalization components and index (Number of Observations = 2671)
- Credit Controls: Number of Observations 2671; Mean 1.591; Standard Deviation 1.111; Minimum 0; Maximum 3
- Interest Rate Controls: Number of Observations 2671; Mean 1.778; Standard Deviation 1.324; Minimum 0; Maximum 3
- Entry Barriers: Number of Observations 2671; Mean 1.769; Standard Deviation 1.179; Minimum 0; Maximum 3
- Bank Regulation and Supervision: Number of Observations 2671; Mean 0.776; Standard Deviation 0.958; Minimum 0; Maximum 3
- Privatization: Number of Observations 2671; Mean 1.248; Standard Deviation 1.187; Minimum 0; Maximum 3
- Capital Account: Number of Observations 2671; Mean 1.668; Standard Deviation 1.135; Minimum 0; Maximum 3
- Securities Market: Number of Observations 2671; Mean 1.490; Standard Deviation 1.129; Minimum 0; Maximum 3
- Financial Reform Index: Number of Observations 2671; Mean 10.321; Standard Deviation 6.333; Minimum 0; Maximum 21
- Financial Reform Index (normalized): Number of Observations 2671; Mean 0.491; Standard Deviation 0.302; Minimum 0; Maximum 1

### Table 3 — Correlations among financial liberalization components
- Panel a. Levels (pairwise correlations)
  - Credit Controls with:
    - Interest Rate Controls 0.651
    - Entry Barriers 0.565
    - Bank Regulations 0.608
    - Privatization 0.494
    - Capital Account 0.587
    - Securities Market 0.624
  - Interest Rate Controls with:
    - Entry Barriers 0.550
    - Bank Regulations 0.590
    - Privatization 0.437
    - Capital Account 0.606
    - Securities Market 0.628
  - Entry Barriers with:
    - Bank Regulations 0.565
    - Privatization 0.435
    - Capital Account 0.513
    - Securities Market 0.545
  - Bank Regulations with:
    - Privatization 0.481
    - Capital Account 0.578
    - Securities Market 0.642
  - Privatization with:
    - Capital Account 0.517
    - Securities Market 0.492
  - Capital Account with Securities Market 0.676
- Panel b. Changes (pairwise correlations of changes)
  - Credit Controls with:
    - Interest Rate Controls 0.148
    - Entry Barriers 0.030
    - Bank Regulations 0.036
    - Privatization 0.013
    - Capital Account 0.096
    - Securities Market 0.098
  - Interest Rate Controls with:
    - Entry Barriers 0.041
    - Bank Regulations -0.002
    - Privatization 0.043
    - Capital Account 0.106
    - Securities Market 0.079
  - Entry Barriers with:
    - Bank Regulations 0.074
    - Privatization 0.021
    - Capital Account 0.089
    - Securities Market 0.053
  - Bank Regulations with:
    - Privatization 0.012
    - Capital Account 0.028
    - Securities Market 0.023
  - Privatization with:
    - Capital Account 0.069
    - Securities Market 0.015
  - Capital Account with Securities Market 0.117

### Table 4 — Distribution of financial sector policy change (in percent), full sample and by country groups
- Row categories: Large Reversal; Reversal; Status Quo; Reform; Large Reform; Total
- Full Sample:
  - Large Reversal 0.50
  - Reversal 4.42
  - Status Quo 65.16
  - Reform 24.65
  - Large Reform 5.27
  - Total 100
- Advanced Economies:
  - Large Reversal 0.14
  - Reversal 1.70
  - Status Quo 73.15
  - Reform 20.60
  - Large Reform 4.40
  - Total 100
- Emerging and Developing Asia:
  - Large Reversal 0.25
  - Reversal 5.64
  - Status Quo 63.73
  - Reform 27.21
  - Large Reform 3.18
  - Total 100
- Latin America and Caribbean:
  - Large Reversal 1.65
  - Reversal 7.72
  - Status Quo 59.19
  - Reform 24.26
  - Large Reform 7.17
  - Total 100
- Sub-Saharan Africa:
  - Large Reversal 0.45
  - Reversal 3.57
  - Status Quo 70.09
  - Reform 21.88
  - Large Reform 4.02
  - Total 100
- Transition Economies:
  - Large Reversal 0.00
  - Reversal 5.16
  - Status Quo 45.24
  - Reform 39.29
  - Large Reform 10.32
  - Total 100
- Middle East and North Africa:
  - Large Reversal 0.00
  - Reversal 3.57
  - Status Quo 69.64
  - Reform 22.77
  - Large Reform 4.02
  - Total 100

### Table 5 — Degree of financial liberalization by components, Average 2005 (components range between 0 and 3)
- Full Sample averages (2005):
  - Credit Controls 2.374
  - Interest Rate Controls 2.725
  - Entry Barriers 2.725
  - Bank Regulations 1.978
  - Privatization 2.000
  - Capital Account 2.363
  - Securities Market 2.253
- Advanced Economies averages (2005):
  - Credit Controls 2.784
  - Interest Rate Controls 3.000
  - Entry Barriers 3.000
  - Bank Regulations 2.636
  - Privatization 2.409
  - Capital Account 3.000
  - Securities Market 3.000
- Emerging and Developing Asia averages (2005):
  - Credit Controls 2.154
  - Interest Rate Controls 2.615
  - Entry Barriers 2.385
  - Bank Regulations 1.538
  - Privatization 1.231
  - Capital Account 2.154
  - Securities Market 2.385
- Latin America and Caribbean averages (2005):
  - Credit Controls 2.191
  - Interest Rate Controls 2.765
  - Entry Barriers 2.706
  - Bank Regulations 1.706
  - Privatization 2.000
  - Capital Account 2.412
  - Securities Market 1.941
- Sub-Saharan Africa averages (2005):
  - Credit Controls 2.304
  - Interest Rate Controls 2.429
  - Entry Barriers 2.714
  - Bank Regulations 1.500
  - Privatization 2.357
  - Capital Account 1.500
  - Securities Market 1.571
- Transition Economies averages (2005):
  - Credit Controls 2.292
  - Interest Rate Controls 2.611
  - Entry Barriers 2.778
  - Bank Regulations 2.167
  - Privatization 2.111
  - Capital Account 2.556
  - Securities Market 2.111
- Middle East and North Africa averages (2005):
  - Credit Controls 2.286
  - Interest Rate Controls 2.857
  - Entry Barriers 2.429
  - Bank Regulations 1.857
  - Privatization 1.143
  - Capital Account 1.857
  - Securities Market 2.143
- Note: “1/ All components vary between 0 and 3.”

### Figures and temporal patterns
- Figure 1 presents the Financial Liberalization Index by country groups for 1973–2005 (series labeled Full Sample; Advanced Economies; Emerging and Developing Asia; Latin America and Caribbean; Sub-Saharan Africa; Transition Economies; Middle East and North Africa).
- Figure 2 shows the distribution of financial sector policy changes over time, 1973–2005, with category shares (Large Reform, Reform, Status Quo, Reversal, Large Reversal) plotted for each year from 1974 through 2005.

*Source: _wp08266 - APPENDIX II. INFORMATION SOURCES (IMF PDF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2008/_wp08266.pdf_