What is the Importance of a Country's Banking Market for Financial Development?

Cláudio Moraes, José Antunes and Márcio Coutinho

No 535, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper analyzes the effect of the banking market on countries' financial development. For this purpose, we use a dynamic panel with annual data, from 2006 to 2015, comprising 89 countries – 28 developed and 61 emerging. The banking market is measured with concentration (total assets of the largest banks in relation to total assets) and competition (Lerner and Boone indexes) metrics. As proxies for measuring the financial development, we use the index developed by Sahay et al. (2015) and Svirydzenka (2016), which covers depth, access, and efficiency, aspects of the financial intermediation provided by banks. The main results suggest that an increase in bank concentration may inhibit the country's financial development and that an increase in competition may increase financial development. In short, an improvement in the banking market (a decrease in concentration or an increase in competition) is relevant to financial development. This result is also verified for emerging countries.

Date: 2020-09
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