The model has a very good ...t with a within R-squared at 0.89. The coe¢cient on the trend break variable is statistically signi...cant at the 5 percent level. It is also economically sizable; the size of the coe¢cient suggests that the growth in ...nancial intermediation accelerates by around 4 percentage points per annum post transition to modern payment systems, which is an economically sizable e¤ect. Moreover, all control variables have expected signs.

In line with prior evidence we ...nd the e¤ect of in‡ation to be non-linear, while overall economic activity has a robust positive e¤ect. We also ...nd evidence that ...scal consolidation leads private credit to expand.

Interestingly, the EBRD banking reform index is assigned a negative coe¢cient, suggesting that better compliance with supervisory standards puts a break on credit creation, as might have been expected.

In line with the result reported in Detragiache et al (2006) for high-income countries, we ...nd there to be no signi...cant e¤ect of foreign ownership on credit.<sup>15</sup> However, we ...nd a robustly positive relationship between public ownership and credit, in line with the evidence reported in Bertrand, Schoar and Thesmar (2007) and consistent with the idea that public ownership results in soft budget constraints on banking ...rms.

Finally, as one would expect there is a positive and signi...cant relationship between capital ‡ows into the banking system (measured by changes in foreign exchange reserves over GDP) and the credit over GDP ratio.

Overall, while macro factors (including in‡ation, capital in‡ows, and GDP) are shown to play an important role, this evidence suggests that privatization and increases in foreign ownership are unlikely to have been an important contributor to increases in credit observed in a number of countries over the sample period. Likewise, the overhaul of the regulatory and supervisory framework appears to have had the e¤ect of slowing rather than accelerating credit growth. Instead, our results single out reform of payment systems as the key ingredient within the overall reform process that led to increases in credit in some of the sample countries.

In Table 3 we present variations of the benchmark speci...cation that were conducted to examine the robustness of our ...ndings across sub samples and lag lengths. Column (1) shows a regression where the sample is restricted to those countries that experienced a payment system reform during the sample period (i.e. excluding Czech Republic, Poland and Romania), with the results virtually unchanged.

While in our preferred speci...cation, control variables are lagged by two quarters (half a year), in columns (2) and (3) we report models that employ a di¤erent lag length (four and zero quarters, respectively) for the controls. In both these speci...cations, while the R-squared remains high and the measured e¤ect on the post reform trend remains

> 15The share of foreign ownership remains insigni...cant when the share of public ownership is omitted from the equation. This implies that the insigni...cant e¤ect is not accounted for by a multicollinearity problem (high correlation) between these two variables.

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