Financial structure convergence

Abstract

Financial structure, the degree to which a country's financial system is market- or bank-based, matters for economic outcomes. Hence, it is important to understand the drivers of financial structure. This paper sheds light on this issue and explores a specific mechanism in the evolution of financial structure, namely convergence. Financial structure is shown to converge across countries over time. This pattern remains similar even after controlling for macroeconomic and institutional factors, or for banking sector characteristics. It is not specific to a region, and appears to be similarly strong around the globe. However, financial structure convergence is somewhat weaker in the emerging market and developing economies relative to the advanced economies. Given the role of financial structure in economic performance, these findings have implications for macroeconomic and financial policies. Moreover, bridging cross-country gaps in financial structure has potential consequences for income differences across countries.