Download Measuring banking sector development

Financial Sector Operations and Policy
Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: [email protected]
Financial Sector Indicators Note: 1
Part of a series illustrating how the Financial Sector Development Indicators (FSDI) project enhances the assessment of financial
sectors by expanding the measurement dimensions beyond size to cover access, efficiency and stability. Data on these dimensions,
as well as other information relevant for financial sector assessment, is intended to become available online during Spring 2006.
Measuring banking sector development
• Traditional measures of size and depth of banking systems limit assessment
• New measure on access to banking, efficiency and stability enhance the analyses
Conventional measures of banking sector
The traditional indicators utilized for assessing
the size, depth and development of a country’s
banking (financial) sector are:
• The ratio of M2 to GDP
• The ratio of private credit to GDP.
In particular, both these measures have been
used to show the causal effects of financial
development on economic growth. However,
both measures have some limitations:
• The ratio of M2 to GDP captures the degree of
monetization in the system, but does not
capture the degree of bank intermediation.
• The ratio of private credit to GDP does not
control for non-performing loans and more
generally, the quality of credit allocation.
• Both measures do not capture the broad
access to bank finance by individuals and
firms, the quality of bank services and the
efficiency of providing banking services.
• In general, the quality and availability of indicators on financial stability is limited and the
documentation of institutional framework
supporting banking lacks robustness.
New indicators for going beyond the size
The Financial Sector Development Indicators
(FSDI) project has compiled indicators that go
beyond size, and can help assess access,
efficiency and stability of financial systems
across and within countries. Banking systems
can score very differently on each of these four
dimensions. It is therefore important to consider
these dimensions jointly and in various combi-
Financial Sector Development Indicators for banking
Traditional
New
Size
Access
Size
Deposit money bank assets to GDP
Central bank assets to GDP
M2 to GDP
Deposits to GDP
Intermediation
Private credit to GDP
Private credit to total credit
Private credit to deposits
Broad access
Branch and ATM density
Average loan and deposit size
Loan & deposit accounts per capita
Household access
% of people with bank account
Firm access
Collateral needed for loan
% of firms with financing constraints
Efficiency
Profitability
Percent Return on assets
Net interest margin
12
NPL/Total Loans
Efficiency
Operating costs
Lending spread
8
Days to clear check
Competitiveness
Concentration ratio
4
Ownership
Size of banking sector
Percent of GDP
1.5
Private
credit/ GDP
1.0
0.5
Stability
0.0
0
High-income:
OECD
Developing
countries
NPL refers to non-performing loans.
Capital adequacy
Capital adequacy ratio
Asset quality
(a) Lenders
Non-performing loans
Real credit growth
Loan concentration
Large loan exposures to capital
(b) Borrowers
Firm leverage
Interest coverage ratio
Household debt to GDP
Liquidity
Liquid asset ratio
Other
Net FX position-to-capital
Default probability of banks
nations. The conventionally used, as well as new
indicators relevant for assessment of banking
system are summarized in the table above. The
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Financial Sector Operations and Policy
Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: [email protected]
indicators within each dimension are also
summarized in a composite index for the purposes of benchmarking and classifying countries.
The majority of the new indicators refer to
access to finance. These indicators summarize
the ability of households and firms in a country
to access finance and the actual usage of
banking services. New indicators on efficiency
include the number of days it takes to clear a
check or to do a wire transfer in a country, a new
measure of the degree of bank competition, and
information on the degree of state or foreign
ownership of banks. New indicators on the
stability of the banking sector, among others,
comprise market-based measures of the probability of default of banks in a country, and data
on the quality and performance of corporate
sector and household borrowers, thus incorporating the user side of finance. In addition, the
stability dimension includes some of the new
financial stability indicators collected by the IMF,
such as information on large loan exposures
and concentration of lending activity.
The FSDI also comprises data on the development of other parts of the financial sector, such
as capital markets and insurance, thus capturing the relationships between the banking and
various other sectors. There are also new
indicators on the quality of the legal infrastructure that supports bank finance, such as creditor
rights, bankruptcy framework, credit information,
and bank regulation and supervision.
Access limited in low-income countries
Utilizing information from new indicators, it
becomes clear that while the difference between
the high-income and developing countries is
relatively less pronounced in terms of size and
depth, it is quite stark in terms of access. Using
the traditional measure of financial development,
private credit to GDP, the difference between the
rich and poor countries is comparatively less
pronounced. The ratio of private credit to GDP
varies from 15 percent in low income countries
to 95 percent in high income countries, or in
other words a 6-fold difference. However, access to finance varies widely across countries,
both in terms of high versus low-income and
within developing countries themselves. The
number of bank accounts per person in highincome countries is on average 2.2, compared
to an average of 0.1 in low-income countries, or
a 22-fold difference. In Madagascar, only 14 out
of 1000 people have a bank account, while in
Austria; on average people have more than 3
bank accounts. Such a comparison, otherwise
restricted without information on bank accounts,
suggests that access to finance is particularly
curtailed in low income countries.
Private credit and number of deposits accounts, 2004
Units
Percent
3
100
Private
credit to
GDP
80
Number of bank accounts per person
This measure is an indicator of the use of banking
services. Based on a questionnaire circulated among
bank regulatory agencies and publicly available data,
information on the number and value of deposits for 54
countries for the year 2004 was collected. A higher
number of bank accounts is interpreted as a signal of
greater use of services. This is the first compilation and
analysis of consistent and comparable cross-country data
on the outreach or penetration of banking systems.
Number of
accounts per
person
2
60
40
1
20
0
0
Highincome
Developing
countries
Lowincome
Lower
Upper
Middle-income
page 2
Financial Sector Operations and Policy
Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: [email protected]
Classification of countries by number of bank deposits
Bank branches and ATMs
Number of
deposits per 1,000
people
Bank
branches
Bottom 5 countries
Madagascar
Bolivia
Uganda
Kenya
Nicaragua
Top 5 countries
Austria
Belgium
Denmark
Malta
Greece
14
41
47
70
96
3120
3080
2706
2496
2418
The limited access to bank finance is also
highlighted in the relationship between traditional
measures of size (or depth and development)
and other new data on access to banking. The
chart (top) shows the relationship between M2/
GDP (a traditional measure of financial depth)
and the number of bank accounts (deposits) per
person, which is a proxy for the use of banking
services. The data on bank accounts are collected using a extensive survey of bank regulatory agencies. The data show that, especially at
intermediate levels of financial development,
financial size and access to banking are not
correlated. This illustrates the importance of
comparing data on access to finance when
assessing financial development in countries.
Concentration does not imply low efficiency
For the bank efficiency dimension, FSDI includes not only traditional measures of bank
profitability (e.g. return on assets) and efficiency
(e.g. ratio of operating costs to assets) but also
information on the structure of banking system
and measures of the competitiveness of the
banking systems (e.g. percentage of banks
assets that are foreign or state-owned, or the
three-bank concentration ratio).
ATMs
(per 100,000)
Bottom-5
Ethiopia
Uganda
Tanzania
Madagascar
Honduras
Top-5
Portugal
Italy
Belgium
Austria
Spain
0.4
0.5
0.6
0.7
0.7
52
52
53
54
96
(per 100,000)
Bottom-5
Bangladesh
Nepal
Tanzania
Madagascar
Pakistan
Top-5
Portugal
Japan
United States
Spain
Canada
0.1
0.1
0.2
0.2
0.5
109
114
121
127
135
Financial depth and access
Number of deposit accounts per capita
4
Depth and access not
correlated at intermediate
level of financial development
3
2
2
R = 0.2565
1
0
0.0
0.5
1.0
1.5
M2/GDP (%)
Concentration is not correlated with efficiency
Operating costs to total assets
0.18
0.12
0.06
0.00
0
50
100
150
3-bank asset concentration ratio (%)
200
page 3
Financial Sector Operations and Policy
Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: [email protected]
The general notion is that a more concentrated
banking sector is less efficient. However, the
chart (bottom, previous page) below shows that
the three-bank asset concentration is not correlated with the ratio of operating cost to assets, a
traditional measure of efficiency. This suggests
that one should not focus solely on concentration ratios as a measure for competition when
making inferences about the efficiency of the
banking sector.
But less depth does indicate less efficiency
Financial depth and efficiency, on the other
hand, appear more closely correlated. The chart
(top) shows the ratio of M2/GDP (financial
depth) against the ratio of average operating
costs-to-total assets, a traditional measure of
bank operating efficiency. The figure shows quite
clearly that countries with less deep banking
systems also have less efficient banks.
Banking and corporate vulnerabilities
For the stability dimension of the financial sector,
FSDI covers not only traditional CAMEL-type
indicators using banks’ balance sheets, but also
indicators based on the balance sheets of
corporate borrowers. The combination of banking and corporate sector indicators provides a
more comprehensive picture of the health of the
banking sector. The chart (bottom) shows that
firms’ financial leverage, measured as the ratio
of corporate debt-to-equity, is positively correlated with the banks share of non-performing
loans in the banking sector. This illustrates the
relationship between the vulnerability of the
corporate sector and the quality of banking
sector assets.
Legal rights facilitate intermediation
Finally, FSDI contains detailed information about
the legal and regulatory infrastructure for the
banking sectors, including creditor rights and
supervisory rules and practices. The main
variables for this set of information are presented in table below. Legal protection of credi-
More efficient banking systems exhibit greater depth
M2/GDP (%)
300
200
100
2
R = 0.2875
0
0.00
0.05
0.10
Operating costs to Total assets
0.15
CAMEL Indicators
The acronym "CAMEL" refers to the five components of a
bank's condition that are assessed: Capital adequacy,
Asset quality, Management, Earnings, and Liquidity. These
aspects reflect the variation in bank asset risk and
leverage, because they capture the market, credit,
operational, and liquidity risk faced by banks.
Corporate leverage and bank non-performing loans
Non-performing loans to total loans (%)
25
20
R2 = 0.131
15
10
5
0
0
50
100
150
200
Corporate Debt to Equity Capital (%)
250
tor rights features as an important determinant
of bank lending. The chart (next page) shows
the strong correlation between private credit-toGDP, a measure of financial intermediation,
against an index of legal rights that measures
the degree to which collateral and bankruptcy
laws facilitate lending.
page 4
Financial Sector Operations and Policy
Financial Sector Development Indicators
Comprehensive assessment through enhanced information capacity
Contact: [email protected]
Legal rights index
This index, reflecting the legal rights of borrowers and lenders, measures the degree to which collateral and
bankruptcy laws facilitate lending. It is based on data collected through study of collateral and insolvency laws,
supported by the responses to the survey on secured transactions laws. The index includes 3 aspects related to
legal rights in bankruptcy and 7 aspects found in collateral law. A score of 1 is assigned for each of the following
features of the laws:
• Secured creditors are able to seize their collateral when a debtor enters reorganization — there is no “automatic
stay” or “asset freeze” imposed by the court.
• Secured creditors, rather than other parties such as government or workers, are paid first out of the proceeds
from liquidating a bankrupt firm.
• Management does not stay during reorganization. An administrator is responsible for managing the business
during reorganization.
• General, rather than specific, description of assets is permitted in collateral agreements.
• General, rather than specific, description of debt is permitted in collateral agreements.
• Any legal or natural person may grant or take security in the property.
• A unified registry that includes charges over movable property operates.
• Secured creditors have priority outside of bankruptcy.
• Parties may agree on enforcement procedures by contract.
• Creditors may both seize and sell collateral out of court.
The index ranges from 0 to 10, with higher scores indicating that collateral and bankruptcy laws are better designed to expand access to credit.
Infrastructure and regulations
Intermediation correlated with creditor's legal rights
Private credit to GDP (%)
Creditor rights
160
Legal protection of creditor rights
Cost to complete bankruptcy (% of estate)
Cost to resolve disputes (% of debt value)
120
Credit information sharing
Cost of registering property (% of property value)
Supervision and regulation
80
2
R = 0.2504
Activity and ownership restrictions
Bank entry restrictions
40
Capital stringency
Official supervisory action
Official supervisory resources
0
0
2
4
6
Legal Rights Index
8
10
Select references
Beck, T., Demigurc-Kunt, A., and Martinez Peria, S.
(2005). “Reaching out: Access to and use of banking
services across countries.”
Claessens, S., and Laeven, L. (2005). “What Drives Bank
Competition? Some International Evidence”, Journal of
Money, Credit, and Banking 36(3), 563-583.
Djankov, S., McLiesh, C., and Shleifer, A. (2005). “Private
Credit in 129 Countries”, Department of Economics,
Harvard University.
Levine, R. (2004). “Finance and Growth: Theory and
Evidence.” forthcoming in Philippe Aghion and Steven
Durlauf, eds. Handbook of Economic Growth. The
Netherlands: Elsevier Science.
Independence of supervisory authority
Availability of information through the FSDI Web site
Data on traditional, as well as new indicators for assessment of banking sectors will all become available through
the FSDI interactive Web site, currently under construction.
Such indicators, along with various other variables, would
form part of an overall framework for assessing financial
sectors that would be available online. Provision of
regional and country details in the Web site will offer
users the flexibility of customizing information to their
unique requirement.
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