Rethinking Financial Deepening: Stability and Growth in Emerging Markets

By 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

May 4, 2015

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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, and Reza Yousefi. Rethinking Financial Deepening: Stability and Growth in Emerging Markets, (USA: International Monetary Fund, 2015) accessed December 3, 2024

Disclaimer: This Staff Discussion Note represents the views of the authors and does not necessarily represent IMF views or IMF policy. The views expressed herein should be attributed to the authors and not to the IMF, its Executive Board, or its management. Staff Discussion Notes are published to elicit comments and to further debate.

Summary

The global financial crisis experience shone a spotlight on the dangers of financial systems that have grown too big too fast. This note reexamines financial deepening, focusing on what emerging markets can learn from the advanced economy experience. It finds that gains for growth and stability from financial deepening remain large for most emerging markets, but there are limits on size and speed. When financial deepening outpaces the strength of the supervisory framework, it leads to excessive risk taking and instability. Encouragingly, 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.

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

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Staff Discussion Notes No. 2015/008
Stock No:

SDNEA201508
ISBN:

9781498312615
ISSN:

2617-6750

Notes

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