some of the cells have less than three indicators or are outright empty, due to data limitations. This is the case in particular for institutional investors and the bond markets where current data limitations sharply restrict the scope for measuring efficiency and reach.

Information on _bank size_ indicators is generally good and a variety of possible indicators may be used. We included deposits, credit, and total (domestic) assets (all divided by GDP).<sup>14</sup> While credit and deposits would be expected to be fairly highly correlated, they measure conceptually different aspects of financial development (banking systems may be able to attract deposits without being able to channel them into credit). In the case of credit, we included both a narrow definition (claims on the private sector by deposit taking institutions) and a broad definition (claims on the private sector by deposit taking and other financial intermediaries). However, while the narrow definition has a very broad coverage (155 countries from 1960 to 2006), the broad definition is only currently available for a subset of 62 countries over a much more limited time period.<sup>15</sup> On _bank efficiency_ , three broadly available potential indicators were pre-selected: i) net interest margins to total earning assets; ii) operating costs to total assets; and iii) bank spreads. They measure closely related yet different dimensions of efficiency.<sup>16</sup> Spreads measure marginal efficiency, interest margins average efficiency.<sup>17</sup> Moreover, while operating costs are a pure measure of operational efficiency that includes all aspects of banking activity (including savings and payments), spreads and margins focus on intermediation exclusively and also include the profit margin of banks, thereby capturing elements of competitiveness. All three indicators are prone to significant measurement error.<sup>18</sup> As regards _bank reach_ , we retained the following three indicators: i) number of ATMs; ii) number of bank deposits; and iii) number of bank branches, all relative to total population.<sup>19</sup> Again, these various indicators measure similar yet somewhat different features of access. Bank branches and ATMs per capita have a broader coverage across

> 14 The data is drawn from IFS but ratios are corrected for possible inflationary distortions reflecting stockflow problems. See Beck, Demirguc-Kunt and Levine (2000).

> 15 Work by the Fund’s Statistics Department to expand the coverage of this series is ongoing.

> 16 Notice also that all three indicators are _in-efficiency_ indicator rather than efficiency indicators (they all decline as banking systems become more efficient).

> 17 Because deposit and lending rates are not averaged over all types of liabilities and assets, spreads measure the efficiency with which a _marginal_ dollar is being intermediated. Hence, a bank whose funding relies primarily on unremunerated demand deposits could have a high net interest margin yet a low spread. 18 The consistency of reporting standards on spreads is questionable across countries, particularly for older measurements. On the other hand, the bank sample on which margins and operating costs are drawn typically does not comprise all banks in a country.

19 We also considered including in our study a synthetic measure of access that extrapolates to a broad sample of 138 countries survey data (available for 32 countries) on the percent of the adult population with access to some financial intermediary account, whether bank-based or microfinance-based (see Honohan, 2006). This index has the substantial advantage of being closer to measuring the ultimate indicator, i.e., actual access to a financial account, and has a much broader coverage. However, while the approach appears to be promising, the index did not perform well in the principal components analysis, perhaps reflecting the need for some methodological fine tuning.

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