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Aerdt Houben and Jan Kakes are from De Nederlandsche Bank. The authors thank Bill Alexander, Christine Cummings, Udaibir Das, Phil Davis, John Fell, Andrew Haldane, Lex Hoogduin, Russell Kincaid, Charles Kramer, Myron Kwast, Donald Mathieson, Tommaso Padoa-Schioppa, Job Swank, and Carel van den Berg for useful comments on an earlier version of this paper. Martin Admiraal, René Bierdrager, and Oksana Khadarina provided excellent research assistance. Garry Schinasi gratefully acknowledges the IMF’s financial support under its Independent Study Leave Program and the support and encouragement of De Nederlandsche Bank (DNB) and the European Central Bank (ECB) while he was visiting them during 2003 and 2004.
Diamond and Dybvig, 1983, and Diamond and Rajan, 2000, explore this in the context of bank intermediation.
Levine (2003) and World Bank (1999) provide overviews of empirical work on the positive contributions between finance and economic development. An important caveat is that the causality between the extent of financial intermediation and the rate of economic growth is difficult to determine empirically, as these variables are inextricably linked and may both be endogenously determined. Theoretical approaches to this issue are developed in Acemoglu and Zilibotti (1997) and Greenwood and Jovanovic (1990).
Levine (1999) finds that the legal and regulatory environment of financial intermediaries is positively associated with economic growth. More specifically, Leahy et al. (2001) show that the transparency and enforcement of these legal and regulatory frameworks, in particular in terms of investor protection, accounting and auditing requirements, is broadly linked to innovation and investment in new enterprises. Beck et al. (2003) establish that countries with better developed national institutions and policies governing issues such as property rights, the rule of law and competition are less likely to suffer systemic banking crises.
This is a conventional distinction; interest risk and currency risk may also be seen as examples of market risk.
Sahajwala and Van den Berg (2000) provide an overview of early warning systems used by central banks and supervisors in the G10 countries.
See Persson and Blåvarg (2003) on the use of financial market indicators in financial stability analysis.
Van der Zwet (2003) discusses this blurring of distinctions between financial sectors and countries, including by looking at variables such as the share of financial institutions’ cross-border and cross-sector revenues.
Some authors choose not to define financial stability and instead use the concept of systemic risk. See Oosterloo and Haan (2003) for a discussion of this concept.
See Ferguson (2003).
Or in other markets that are most relevant to bank liquidity, such as foreign exchange markets.