## Taming Financial Development to Reduce Crises

_IMF Working Papers, May 6, 2019_

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## Bibliographic details
- Authors: Bertrand Candelon, Quentin Lajaunie
- Published: May 6, 2019
- Series: IMF Working Papers

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### Overview and methodology
- Authors: Bertrand Candelon, Quentin Lajaunie
- Publication date: May 6, 2019
- Publication series: Working Paper No. 2019/094 (Issue: 094; Volume: 2019)
- Pages: 28
- ISBN: 9781498312011
- ISSN: 1018-5941
- Empirical approach: estimation of a dynamic logit panel model
- Data: database covering financial development, financial access, depth and efficiency for almost 100 countries

### Key findings
- Financial development can trigger the occurrence of banking crises.
- The institutional dimension of financial development is associated with triggering financial instability within a one- to two-year horizon.
- The market dimension of financial development is also associated with triggering instability, but to a lesser extent than the institutional dimension.
- Financial access has heterogeneous effects:
  - Destabilizing for advanced countries.
  - Stabilizing for emerging and low income countries.

### Analytical implications
- The timing of effects: identified trigger window is within a one- to two-year horizon following changes in financial development indicators.
- The distinction between institutional and market dimensions is central for understanding pathways to financial instability.
- Heterogeneous role of financial access implies that aggregate measures may conceal opposing effects across country groups.

### Policy implications and recommendations
- Macroprudential policies should account for the finding that financial development—especially along institutional dimensions—can increase near-term systemic risk.
- Financial regulations need to be calibrated to:
  - Recognize the stronger destabilizing role of institutional aspects of financial development.
  - Differentiate approaches to financial access: more restrictive or monitored expansion in advanced countries versus supportive access-enhancing measures in emerging and low income countries, reflecting their stabilizing impact there.
- Early-warning frameworks and crisis prevention tools should incorporate dynamic logit panel model–style indicators to capture the one- to two-year horizon risk signalling.

*Source: IMF Working Paper "Taming Financial Development to Reduce Crises", Bertrand Candelon and Quentin Lajaunie, May 6, 2019; Working Paper No. 2019/094.*

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_Source: https://www.imf.org/en/publications/wp/issues/2019/05/06/taming-financial-development-to-reduce-crises-46813_