The case of Korea reinforces these points, especially in regard to the vulnerabilities that can be created by the high leverage and weakened creditworthiness associated with credit booms. The Korean experience of the 1960s and 1970s could be seen as – and I think are – part of the positive feedback interaction between monetary deepening and a strengthening of the economic structure. But if we look at the last 20 years, the Korean data seems to show a negative association between banking depth and growth. This is especially so if we take the conventional base of the core banks – the so-called deposit money bank of _International Financial Statistics_ . Here the rapid acceleration in monetary depth of the late 1990s seems to coincide with the collapse in growth rates. But such a sharp break in trend as we see at 1996-97 alerts the applied economist to the likelihood that something else is happening in the background that (even if there is no change in the statistical definitions used to construct the series – and there is none here) alters the interpretation or representativeness of the series. Indeed, something was going on and – interestingly it was a phenomenon which confused Korean policy-makers at the time, pulling some statistical wool over their eyes and blinding them to an impending disaster. As is explained by Cho (2001), Korean financial institutions and their customers, maneuvering around both macroeconomic policy (including monetary targets) and prudential controls, began to employ forms of credit which were off the balance sheets of the commercial banks. Monetary aggregates – based on the balance sheets of the banks – were reassuringly stable, and prudential warning bells remained silent even as rapid increases in corporate leverage, especially short-term indebtedness, heightened the vulnerability of the entire economy. Adding back in the credit issued by near-banks<sup>16</sup> shows the true evolution of credit in Korea: a steady and rapid rate of increase until the crisis. The effect of the adjustment is to reinforce the appearance: rapid credit growth precedes a crisis. And this is, of course, a fairly universal observation (Honohan 1997; Demirgüç-Kunt and Detragiache 2001, etc.).

Another message of the Korean and UK experience is the increasing slipperiness of the data as the financial sector increases in complexity and scale. We saw how crucial the dividing line between commercial banks and near-banks was for interpreting the scale of Korean intermediation. Rolling forward the UK data reveals several huge changes in the measured aggregates (both increases and decreases) as statistical conventions were revised over the years from 1980 to try to keep appropriate track of financial innovations. Between 1986 and 1987, the definition of bank deposits was revised, bringing the measured ratio in _IFS_ of M2 (money plus quasi-money) to GDP from 46.8% in 1986 to 80.5% the following year. How can cross-country comparisons be relied upon if even within a country two acceptable definitions of monetary depth can be so widely differing for consecutive years. As a rule of thumb, I suggest that any country which has a monetary depth of 100% has already satisfied the minimum scale criterion for having reached the frontier in financial development: a necessary condition, but not a sufficient one.

> 16 The “Other Banking Instititutions” of _International Financial Statistics_ .  There may be a slight overstatement here in that some bank credit received by nonbank financial institutions is double-counted; but this is small.

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