Finance: additional data

Lane Kenworthy, The Good Society
November 2020


Since the mid-1970s, many of the rich democratic countries have reduced regulations on the financial sector. These charts show a financial regulation index for 12 of these nations covering the period 1973-2005.



Figure A1. Financial regulation
Higher values indicate more regulation. The index is constructed by combining seven dimensions of financial regulation: (1) Credit controls: capture restrictions on the amounts of bank lending to specific sectors or ceiling on overall credit extended by banks. (2) Interest rate controls: capture the degree to which banks are restricted in setting rates (whether floor or ceiling interest rates exist and/or bind). (3) Entry barriers: capture barriers to entry into the financial system which may take the form of restrictions on the participation of foreign banks; restrictions on the scope of banks’ activities; restrictions on the geographic area where banks can operate; or excessively restrictive licensing requirements. (4) Privatization: captures the degree to which the government is not involved directly in financial services (using thresholds of 50%, 25%, and 10% of state ownership to differentiate between full state control and full liberalization, respectively). (5) Capital account restrictions: capture having multiple exchange rates for various transactions, as well as transactions taxes or outright restrictions on inflows and/or outflows. (6) Securities market development captures policies that governments use to encourage development of securities markets; these include auctioning of government securities, establishment of debt and equity markets and policies to encourage development of these markets (such as tax incentives or development of depository and settlement systems), and policies to promote the openness of securities markets to foreign investors. (7) Prudential regulation and supervision: captures whether a country adopted risk‐based capital adequacy ratios based on the Basle I capital accord, and whether the banking supervisory agency is independent from the executive’s influence and has sufficient legal power. Each index originally ranges from 0 to 3, where 3 indicates the most restrictive regulations, except in 7, where 0 indicates the most restrictive regulation. The deregulation index is the sum of indices 1 to 6 minus index 7. Data source: Thomas Philippon and Ariell Reshef, “An International Look at the Growth of Modern Finance,” Journal of Economic Perspectives, 2013, online appendix, figure A4, using data from Abiad, Detragiache, and Tressel, “A New Database of Financial Reforms,” International Monetary Fund Working Paper 08/266, 2008.