Do Financial Sector Reforms Lead to Financial Development? Evidence from a New Dataset

By T. Tressel, E. Detragiache. Social Science Research Network, 2008

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This paper studies whether the policies that, over the past decades, liberalized banking systems around the world have resulted in deeper credit markets. To measure banking sector reforms we use a new index that tracks policy changes in five separate areas for 91 countries over 1973-2005. We find that reforms have led to financial deepening, but only in countries with institutions that place checks and balances on political power. We interpret this as evidence of a complementarity between financial sector reforms and political institutions that protect property rights. Other country characteristics do not seem to significantly influence the effect of banking reforms on financial development.

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