The Stability of The Financial System: a Comparison of Developed and Less Developed Countries

Abstract

In this study, we examine the relationship between the development level of a country and stability of its financial system. We look at seven measures of stability. These are Bank z-score, Bank non-performing loans to gross loans, Bank capital to total assets, Bank credit to bank deposits, Regulatory capital to risk-weighted assets, Liquid assets to deposits and short term funding, and Provisions to non-performing loans. First, we compare developed and less developed countries’ stability measures. Do developed countries have more stable financial systems than less developed countries or is the opposite true? When we compare high-income countries to low- and middle-income countries, we find that low- and middle-income countries have better “stability” values in five measures. For the other two measures, we do not find any significant difference between the two groups. Then, we look at how high-income OECD countries differ from high-income non-OECD countries in terms of their financial system’s stability. When we compare high-income OECD-member countries to high-income Non-OECD-member countries, we find that high-income Non-OECD-member countries have better “stability” values in four measures. For the other three measures, we do not find any significant difference between the two groups. We conclude that developed countries, especially OECD members, are under greater risk when facing an economic/financial crisis.