Abstract
This paper introduces a new database of financial reforms covering 91 economies over 1973–2005. It describes the content of the database, the information sources utilized, and the coding rules used to create an index of financial reform. It also compares the database with other measures of financial liberalization, provides descriptive statistics, and discusses some possible applications. The database provides a multifaceted measure of reform, covering seven aspects of financial sector policy. Along each dimension the database provides a graded (rather than a binary) score, and allows for reversals.
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Notes
An earlier version of the database, covering 36 countries over the period 1973–96 and slightly different categories of reform was used by Abiad and Mody (2005) to investigate how political and economic factors shaped the financial liberalization process.
The database is available online at http://www.imf.org/external/pubs/ft/wp/2008/data/wp08266.zip.
On the latter, judgment needs to be exercised as some prudence is necessarily required in the granting of licenses, so whenever possible we relied on other scholars’ assessments as to whether a country's licensing regime was excessively strict or not.
A raw score was first assigned to each dimension, on different scale. Next, each raw score was normalized between 0 and 3 according to a rule.
A recent paper by Schindler (2009) codes financial account restrictions using the IMF's Annual Report on Exchange Rate Restrictions for a sample of 91 countries over the period 1995–2005. Other existing indices of financial account restrictions are reviewed in Schindler (2009).
According to García-Herrero, Gavila, and Santabárbara (2005), “Joint-stock commercial banks (JSCB) are partially owned by local governments and state owned enterprises, and sometimes by the private sector. They are generally allowed to operate at the national level. City commercial banks are not allowed to operate at the national or regional scale unlike the JSCBs, which is their major competitive disadvantage.”
Similar conclusions emerge if one uses changes over three-year periods.
Specifically, the credit control component was normalized to take values between 0 and 3.
Two OECD members—Korea and Mexico—are included in their regional grouping rather than in the OECD group. The income categories are based on the grouping in the World Bank's 2002 World Development Indicators.
This appendix was prepared by Kruti Barucha. The coding rules used in the index follow closely those of Omori (2004), which extend the approach developed by Abiad and Mody (2005). The main departure from Omori's coding is the introduction of a new category covering for restrictions on the quantity of credit.
According to Omori (2004, p. 13): “Quintyn and Taylor (2002) categorize the independence of banking supervisory agencies into four: regulatory independence, supervisory independence, institutional independence, and budgetary independence. In this dataset, independence is measured by combining institutional independence and supervisory independence. In the case of central bank independence, a legal framework of a central bank for developed countries and/or the frequency of turnover of governor of the central bank for developing countries are often used indicators. However, as discussed above, since the banking supervisory agency is not necessarily vested in the central bank, legal documents for banking supervision are less available and obtaining the information for counting the frequency of the turnover of the head of the banking supervisory agency is much more difficult. In this vein, we basically relied on experts or researchers’ evaluation in coding the independence of the banking supervisory agency. Lora (1997) also created the indicator based on subjective judgment of the quality of banking supervision.”
References
Abiad, Abdul, and Ashoka Mody, 2005, “Financial Liberalization: What Shakes It?” What Shapes It? American Economic Review, Vol. 95, No. 1, pp. 66–88.
Abiad, Abdul, Enrica Detragiache, and Thierry Tressel, 2008, “A New Database of Financial Reforms,” IMF Working Paper No. 08/266 (Washington, International Monetary Fund).
Bandiera, Oriana, G. Caprio, P. Honohan, and F. Schiantarelli, 2000, “Does Financial Reform Raise or Reduce Saving? Review of Economics and Statistics, Vol. 82, No. 2, pp. 239–263.
Bisat, Amer, R. Barry Johnston, and Vasudevan Sundararajan, 1992, “Issues in Managing and Sequencing Financial Sector Reform: Lessons from the Experiences in Five Developing Countries,” IMF Working Paper No. 92/82 (Washington, International Monetary Fund).
Caprio, Gerard, Patrick Honohan, and Joseph E. Stiglitz, (eds.) 2001, Financial Liberalization: How Far, How Fast? (New York, Cambridge University Press).
De Brouwer, Gordon, and Wisarn Pupphavesa, 1999, Asia Pacific Financial Deregulation (London and New York, Routledge).
Demirgüç-Kunt, Asli, and Enrica Detragiache, 1998, “Determinants of Banking Crises in Developed and Developing Countries,” IMF Staff Papers, Vol. 45, No. 1, pp. 89–109.
Demirgüç-Kunt, Asli, and Enrica Detragiache, 1999, “Financial Liberalization and Financial Fragility,” in Annual World Bank Conference on Development Economics 1998, ed. by B. Pleskovic and J.E. Stiglitz (Washington, World Bank).
Edison, Hali, Michael W. Klein, Luca A. Ricci, and Torsten Sløk, 2004, “Capital Account Liberalization and Economic Performance: Survey and Synthesis,” IMF Staff Papers, Vol. 51, No. 2, pp. 220–256.
Edison, Hali J., and Frank Warnock, 2003, “A Simple Measure of the Intensity of Capital Controls,” Journal of Empirical Finance, Vol. 10, No. 1, pp. 81–103.
Fanelli, José Maria, and Rohinton Medhora, (eds.) 1998, Financial Reform in Developing Countries (Houndmills, United Kingdom, IDRC Books and Macmillan Press).
García-Herrero, Alicia, and Daniel Santabárbara, 2004, Where Is The Chinese Banking System Going With The Ongoing Reform? Bank of Spain Occasional Paper No. 0406.
García-Herrero, Alicia, Sergio Gavila, and Daniel Santabárbara, 2005, “China's Banking Reform: An Assessment of its Evolution and Possible Impact,” Bank of Spain Occasional Paper No. 0502.
Goodfriend, Marvin, and Eswar Prasad, 2006, “A Framework for Independent Monetary Policy in China,” IMF Working Paper No. 06/111 (Washington, International Monetary Fund).
Johnston, R. Barry, and V. Sundararajan, (eds.) 1999, Sequencing Financial Sector Reforms: Country Experiences and Issues (Washington, International Monetary Fund).
Kaminsky, Graciela Laura, and Carmen M. Reinhart, 1999, “The Twin Crises: The Causes of Banking and Balance of Payments Problems,” American Economic Review, Vol. 89, No. 3, pp. 473–500.
Kaminsky, Graciela Laura, and Sergio L. Schmukler, 2003, “Short-Run Pain, Long-Run Gain: The Effects of Financial Liberalization,” IMF Working Paper 03/34 (Washington, International Monetary Fund).
Laeven, Luc, 2003, “Does Financial Liberalization Reduce Financing Constraints?” Financial Management, Vol. 32, No. 1, pp. 5–34.
Levine, Ross, 2005, “Finance and Growth: Theory and Evidence,” in Handbook of Economic Growth, Vol. 1, ed. by Philippe Aghion and Steven Durlauf (Amsterdam, Elsevier Science).
Lora, E., 1997, “A Decade of Structural Reforms in Latin America: What Has Been Reformed and How to Measure It,” IDB Working Paper No. 348 (Washington, Inter-American Development Bank).
McKinnon, Ronald I., 1973, Money and Capital in Economic Development (Washington, The Brookings Institution).
Omori, Sawa, 2004, “Financial Liberalization Dataset Version 2: Measuring Seven Dimensions of Financial Liberalization,” (unpublished; University of Pittsburgh).
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Additional information
*Abdul Abiad and Thierry Tressel are senior economists with the IMF Research Department. Enrica Detragiache is an advisor with the IMF Institute. The authors are grateful to Aart Kraay, Ashoka Mody, Antonio Spilimbergo, and Barbara Stallings for helpful comments and suggestions. The latest version of this database could not have been completed without the expert contributions of Sawa Omori, Kruti Bharucha, and Adil Mohommad. The authors also thank Radu Paun and Eun-Jue Chung for excellent research assistance.
Appendix 1
Appendix 1
Coding Rules for the Financial Liberalization Index Footnote 10
To construct an index of financial liberalization, codes were assigned along the eight dimensions below. Each dimension has various subdimensions. Based on the score for each subdimension, each dimension receives a “raw score.” The explanations for each subdimension below indicate how to assign the raw score.
After a raw score is assigned, it is normalized to a 0–3 scale. The normalization is done on the basis of the classifications listed below for each dimension. That is, fully liberalized=3; partially liberalized=2; partially repressed=1; fully repressed=0.
The final scores are used to compute an aggregate index for each country/year by assigning equal weight to each dimension.
For example, if the raw score on credit controls and reserve requirements totals 4 (by assigning a code of 2 for liberal reserve requirements, 1 for lack of directed credit and 1 for lack of subsidized directed credit), this is equivalent to the definition of fully liberalized. So, the normalization would assign a score of 3 on the 0–3 scale.
Credit Controls and Reserve Requirements
-
1
Are reserve requirements restrictive?
-
Coded as 0 if reserve requirement is more than 20 percent.
-
Coded as 1 if reserve requirements are reduced to 10 to 20 percent or complicated regulations to set reserve requirements are simplified as a step toward reducing reserve requirements.
-
Coded as 2 if reserve requirements are less than 10 percent.
-
-
2
Are there minimum amounts of credit that must be channeled to certain sectors?
-
Coded as 0 if credit allocations are determined by the central bank or mandatory credit allocations to certain sectors exist.
-
Coded as 1 if mandatory credit allocations to certain sectors are eliminated or do not exist.
-
-
3
Are there any credits supplied to certain sectors at subsidized rates?
-
Coded as 0 when banks have to supply credits at subsidized rates to certain sectors.
-
Coded as 1 when the mandatory requirement of credit allocation at subsidized rates is eliminated or banks do not have to supply credits at subsidized rates. These three questions’ scores are summed as follows: fully liberalized=4, largely liberalized=3, partially repressed=1 or 2, and fully repressed=0.
-
-
4
Are there any aggregate credit ceilings?
-
Coded as 0 if ceilings on expansion of bank credit are in place. This includes bank-specific credit ceilings imposed by the central bank.
-
Coded as 1 if no restrictions exist on the expansion of bank credit.
-
The final subindex is a weighted average of the sum of the first three categories (with a weigh of ¾), and of the last category (with a weigh of ¼).
Interest Rate Liberalization
Deposit rates and lending rates are separately considered, in coding this measure, in order to look at the type of regulations for each set of rates. They are coded as being government set or subject to a binding ceiling or floor (code=0), fluctuating within a band (code=1) or freely floating (code=2). The coding is based on the matrix in Table A1.
Banking Sector Entry
-
1
To what extent does the government allow foreign banks to enter into a domestic market? This question is coded to examine whether a country allows the entry of foreign banks into a domestic market; whether branching restrictions of foreign banks are eased; to what degree the equity ownership of domestic banks by nonresidents is allowed.
-
Coded as 0 when no entry of foreign banks is allowed; or tight restrictions on the opening of new foreign banks are in place.
-
Coded as 1 when foreign bank entry is allowed, but nonresidents must hold less than 50 percent equity share.
-
Coded as 2 when the majority of share of equity ownership of domestic banks by nonresidents is allowed; or equal treatment is ensured for both foreign banks and domestic banks; or an unlimited number of branching is allowed for foreign banks.
-
-
2
Does the government allow the entry of new domestic banks?
-
Coded as 0 when the entry of new domestic banks is not allowed or strictly regulated.
-
Coded as 1 when the entry of new domestic banks or other financial institutions is allowed into the domestic market.
-
-
3
Are there restrictions on branching?
-
Coded as 0 when branching restrictions are in place.
-
Coded as 1 when there are no branching restrictions or if restrictions are eased.
-
-
4
Does the government allow banks to engage in a wide rage of activities?
-
Coded as 0 when the range of activities that banks can take consists of only banking activities.
-
Coded as 1 when banks are allowed to become universal banks.
-
These four questions’ scores are summed as follows: fully liberalized=4 or 5, largely liberalized=3, partially repressed=1 or 2, and fully repressed=0.
Financial Account Transactions
-
1
Is the exchange rate system unified?
-
Coded as 0 when a special exchange rate regime for either capital or current account transactions exists.
-
Coded as 1 when the exchange rate system is unified.
-
-
2
Does a country set restrictions on capital inflow?
-
Coded as 0 when restrictions exist on capital inflows.
-
Coded as 1 when banks are allowed to borrow from abroad freely without restrictions and there are no tight restrictions on other capital inflows.
-
-
3
Does a country set restrictions on capital outflow?
-
Coded as 0 when restrictions exist on capital outflows.
-
Coded as 1 when capital outflows are allowed to flow freely or with minimal approval restrictions.
-
These three questions’ scores are summed as follows: fully liberalized=3, largely liberalized=2, partially repressed=1, and fully repressed=0.
Privatization
-
Privatization of banks is coded as follows:
-
Fully liberalized if no state banks exist or state-owned banks do not consist of any significant portion of banks and/or the percentage of public bank assets is less than 10 percent.
-
Largely liberalized if most banks are privately owned and/or the percentage of public bank assets is from 10 to 25 percent.
-
Partially repressed if many banks are privately owned but major banks are still state-owned and/or the percentage of public bank assets is 25 to 50 percent.
-
Fully repressed if major banks are all-state owned banks and/or the percentage of public bank assets is from 50 to 100 percent.
-
Securities Markets
-
1
Has a country taken measures to develop securities markets?
-
Coded as 0 if a securities market does not exist.
-
Coded as 1 when a securities market is starting to form with the introduction of auctioning of treasury bills or the establishment of a security commission.
-
Coded as 2 when further measures have been taken to develop securities markets (tax exemptions, introduction of medium and long-term government bonds in order to build the benchmark of a yield curve, policies to develop corporate bond and equity markets, or the introduction of a primary dealer system to develop government security markets).
-
Coded as 3 when further policy measures have been taken to develop derivative markets or to broaden the institutional investor base by deregulating portfolio investments and pension funds, or completing the full deregulation of stock exchanges.
-
-
2
Is a country's equity market open to foreign investors?
-
Coded as 0 if no foreign equity ownership is allowed.
-
Coded as 1 when foreign equity ownership is allowed but there is less than 50 percent foreign ownership.
-
Coded as 2 when a majority equity share of foreign ownership is allowed.
-
These two questions’ scores are summed as follows: fully liberalized=4 or 5, largely liberalized=3, partially repressed=1 or 2, and fully repressed=0. If information on the second subdimension was not available (which was the case for some low-income countries), the measure was coded using information on securities market development. If information on securities markets only was considered, a 0–3 scale was assigned based on the score on securities markets.
Banking Sector Supervision
-
1
Has a country adopted a capital adequacy ratio based on the Basel standard? (0/1)
-
Coded as 0 if the Basel risk-weighted capital adequacy ratio is not implemented. Date of implementation is important, in terms of passing legislation to enforce the Basel requirement of 8 percent capital adequacy ratio (CAR).
-
Coded as 1 when Basel CAR is in force. (Note: If the large majority of banks meet the prudential requirement of an 8 percent risk-weighted capital adequacy ratio, but this is not a mandatory ratio as in Basel, the measure is still classified as 1.) Prior to 1993, when the Basel regulations were not in place internationally, this measure takes the value of 0.
-
-
2
Is the banking supervisory agency independent from executives’ influence? (0/1/2) A banking supervisory agency's independence is ensured when the banking supervisory agency can resolve banks’ problems without delays. Delays are often caused by the lack of autonomy of the banking supervisory agency, which is caused by political interference. For example, when the banking supervisory agency has to obtain approval from different agencies such as the ministry of finance in revoking or suspending licenses of banks or liquidating banks’ assets, or when the ultimate jurisdiction of the banking supervisory agency is the ministry of finance, it often causes delays in resolving banking problems. In addition to the independence from political interference, the banking supervisory agency also has to be given enough power to resolve banks’ problems promptly.Footnote 11
-
Coded as 0 when the banking supervisory agency does not have an adequate legal framework to promptly intervene in banks’ activities; and/or when there is the lack of legal framework for the independence of the supervisory agency such as the appointment and removal of the head of the banking supervisory agency; or the ultimate jurisdiction of the banking supervision is under the ministry of finance; or when a frequent turnover of the head of the supervisory agency is experienced.
-
Coded as 1 when the objective supervisory agency is clearly defined and an adequate legal framework to resolve banking problems is provided (the revocation and the suspension of authorization of banks, liquidation of banks, and the removal of banks’ executives, and so on) but potential problems remain concerning the independence of the banking supervisory agency (for example, when the ministry of finance may intervene into the banking supervision in such as case that the board of the banking supervisory agency board is chaired by the ministry of finance, although the fixed term of the board is ensured by law); or although clear legal objectives and legal independence are observed, the adequate legal framework for resolving problems is not well articulated.
-
Coded as 2 when a legal framework for the objectives and the resolution of troubled banks is set up and if the banking supervisory agency is legally independent from the executive branch and actually not interfered with by the executive branch.
-
-
3
Does a banking supervisory agency conduct effective supervisions through on-site and off-site examinations? (0/1/2) Conducting on-site and off-site examinations of banks is an important way to monitor banks’ balance sheets.
-
Coded as 0 when a country has no legal framework and practices of on-site and off-site examinations is not provided or when no on-site and off-site examinations are conducted.
-
Coded as 1 when the legal framework of on-site and off-site examinations is set up and the banking supervision agency have conducted examinations but in an ineffective or insufficient manner.
-
Coded as 2 when the banking supervisory agency conducts effective and sophisticated examinations.
-
-
4
Does a country's banking supervisory agency cover all financial institutions without exception? (0/1) If some kinds of banks are not exclusively supervised by the banking supervisory agency or if offshore intermediaries of banks are excluded from the supervision, the effectiveness of the banking supervision is seriously undermined.
-
Coded as 1 when all banks are under supervision by supervisory agencies without exception.
-
Coded as 0 if some kinds of financial institutions are not exclusively supervised by the banking supervisory agency or are excluded from banking supervisory agency oversight.
-
These questions’ scores are summed as follows: highly regulated=6, largely regulated=4 or 5, less regulated=2 or 3, not regulated=0 or 1.