This paper, to our knowledge, is the first attempt at summarizing and investigating the properties of national strategies for the financial sector. We use a sample of 78 countries at different levels of development from around the world to carry out our study. The sample has been “stratified” to cover all geographic regions, various levels of development, and different structures of national financial systems and experience of financial crises, among other factors. We examine and rate the national financial sector strategies based on how well they define development targets, arrangements for systemic risk management, and implementation plans for the strategy.<sup>3</sup> Moreover, we rate the strategies on whether they consider policy trade-offs between financial development and systemic risk accumulation.<sup>4</sup> The rated strategies are then benchmarked against a wide range of country characteristics.<sup>5</sup> We find that the scope and quality of national strategies for the financial sector are influenced by the type of legal system in a given country, its level of income and macroeconomic stability, its existing financial depth and inclusion, the share of foreign ownership in the national financial sector, and the experience of past financial crises. More specifically:

- (i) If a country’s legal system is based on mixed law, and on civil, common, or mixed law, the country is, respectively, more attentive to financial development objectives, and to planning for implementation in its financial sector strategy. Interestingly, countries with legal systems based on civil law and religious law are more likely to address trade-offs between financial development and stability.

- (ii) As their per capita income increases, countries pay less attention to development objectives, and, surprisingly, they also pay less attention to systemic risk. At the same time, greater governance effectiveness helps countries address policy trade-offs in their financial sector strategies.

- (iii) As financial inclusion increases and country financial systems deepen, the national financial sector strategies progressively neglect development objectives and systemic risk, respectively. Concurrently, the increasing depth of credit markets sharpens countries’ focus on broader financial development objectives—presumably concerning other financial services, not just credit.

- (iv) Greater foreign ownership in the domestic banking system intensifies the attention countries pay to the trade-off between financial development and systemic risk management.

- (v) Experience of past banking crises raises countries’ awareness of challenges in the financial sector and stimulates greater planning for implementation of financial sector strategies. However, as the

> 3 We would like to emphasize here that the rating takes into account _implementation plans,_ not the actual implementation or its outcomes.

> 4 Although other policy trade-offs may also exist, such as that between financial inclusion and market integrity, we focus on the trade-off between financial development (inclusion) and financial stability. We focus on this trade-off as the most important one, based on the lessons from the global financial crisis that has been in many respects caused by irresponsible financial inclusion in credit.

> 5 We have considered, in addition to the various benchmarking variables presented in the paper, the possible effect of the Financial Sector Assessment Program (FSAP)—conducted by the International Monetary Fund and the World Bank—on the scope and quality of national financial sector strategies. However, because of the possible long time lag and lead effects, as countries either react to (receive technical assistance) after an FSAP or prepare and revamp their strategies before an FSAP, we left this possible benchmarking variable for future research. Note that section 5 explains how we have addressed possible endogeneity issues in our regression.

- 4 -