Rethinking Financial Deepening: Stability and Growth in Emerging Markets

Staff Discussion Notes, May 4, 2015

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Rethinking Financial Deepening: Stability and Growth in Emerging Markets

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Bibliographic details

• Authors: Ratna Sahay, Martin Cihak, Papa M N'Diaye, Adolfo Barajas, Diana B Ayala Pena, Ran Bi, Yuan Gao, Annette J Kyobe, Lam Nguyen, Christian Saborowski, Katsiaryna Svirydzenka, Reza Yousefi
• Published: May 4, 2015
• Series: Staff Discussion Notes
• DOI: https://doi.org/10.5089/9781498312615.006

Summary and framing

• The global financial crisis experience "shone a spotlight on the dangers of financial systems that have grown too big too fast."
• The note "reexamines financial deepening, focusing on what emerging markets can learn from the advanced economy experience."
• Core conclusion: gains for growth and stability from financial deepening remain large for most emerging markets, but there are limits on size and speed.

Key findings

• Financial deepening can deliver substantial benefits for growth and stability in most emerging markets.
• When financial deepening outpaces the strength of the supervisory framework, it leads to excessive risk taking and instability.
• The set of regulatory reforms that promote financial depth is essentially the same as those that contribute to greater stability.
• "Better regulation—not necessarily more regulation—thus leads to greater possibilities both for development and stability."

Policy implications and recommendations

• Strengthen supervisory frameworks to keep pace with financial deepening to avoid excessive risk taking and instability.
• Prioritize regulatory reforms that both promote financial depth and enhance stability rather than simply increasing the volume of regulation.
• Focus on the quality of regulation ("better regulation") as a means to expand development opportunities while preserving stability.

Metadata and classification (from publication)

• Authors: Ratna Sahay, Martin Cihak, Papa M N'Diaye, Adolfo Barajas, Diana B Ayala Pena, Ran Bi, Yuan Gao, Annette J Kyobe, Lam Nguyen, Christian Saborowski, Katsiaryna Svirydzenka, Reza Yousefi
• Date: May 4, 2015
• Series: Staff Discussion Notes No. 2015/008
• Issue: 008
• Volume: 2015
• Pages: 41
• DOI: https://doi.org/10.5089/9781498312615.006
• Stock No: SDNEA201508
• ISBN: 9781498312615
• ISSN: 2617-6750
• Subject: Commercial banks, Financial sector, Financial sector development, Financial sector stability, Stock markets
• Keywords: bank credit, capital market, financial crisis, insurance market liberalization, marginal costs and benefits, private sector, SDN

Rethinking Financial Deepening: Stability and Growth in Emerging Markets, Staff Discussion Notes No. 2015/008.

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