So, in summary, several drawbacks have been noted to the use of banking aggregates as proxies for overall financial development. Monetary depth will be a misleading indicator of financial development if the savings so mobilized are being monopolized by the state. That is not to say that the liquidity and money transmission services being provided by narrow banking systems are of no importance, but they are arguably simpler to achieve: the hugely important credit dimension cannot be neglected. Turning to private credit, an issue of quality arises: if expanded too rapidly or too much, credit creates risks both microeconomic (poor judgement on the allocation of credit) and macroeconomic (excessive leverage creates linked vulnerabilities to various adverse shocks).

Two other quantitative bank-related measures of financial development have been proposed and I mention them here for completeness. Neither is unproblematic. First is the value-added of the banking sector as measured in the national income and expenditure accounts.<sup>17</sup> To the extent that the value-added does represent the contribution of the sector to GDP, it would appear to be a potentially good measure. In particular, if the prices charged and profits received indicate social value provided, then it may take us beyond the aggregates. However, it is largely an input-based measure in an environment often characterized by lack of competition, and one in which many of the social benefits of intermediation may not be captured by the intermediaries. Protection and lack of competitiveness in the financial system are likely to increase unit costs and profitability, thereby expanding this measure while holding the effectiveness of the system well below its potential.

The other bank-related measure is one of efficiency: interest rate spreads or margins.<sup>18</sup> This potentially disposes of the problem of uncompetitive systems, but is very partial in its focus: scale has fallen out altogether. Also, since interest spreads vary widely depending on the credit and maturity risks, as well as the monitoring costs that are involved, they may be considered exceptionally problematic in a cross-country comparison.

# _Scale and activity of equity and bond markets_

Though bank-dominated financial systems remain the norm in developing countries, increasing emphasis has been placed in recent years on the development of securities markets (mainly for debt and equities, though the growth of derivatives markets has been especially rapid). A comprehensive statistical view of financial system development clearly needs to take these markets into account also and this has been done largely with the use of aggregates such as total market capitalization, and the liquidity of the stock market as measured by the turnover ratio. Some studies suggest that market activity, as measured by the turnover ratio, predict growth (Levine and Zervos 1998; Beck and Levine 2002).<sup>19</sup>

> 17 There are some important technical issues here related to the allocation of banking margins – the socalled “imputed service charge”.

> 18 Spreads are measured by subtracting one interest rate from another; margins by expressing net interest receipts of an intermediary as a percentage of total assets or some other relevant aggregate.

19 Personally I have some doubts that the turnover ratio is simply capturing churning; is it not likely that instead it is acting as a proxy for the degree of genuine reliance on the stock market for financing. Markets in which there is little trading of the listed shares are likely to be those in which the share of corporate 13