Abstract
In this study, first we look at the relation between countries’ income levels and their banking systems. What are the differences between richer countries and other countries in terms of their banking systems? Then, we look at how OECD membership affects the banking system of a country. When we compare High-Income countries to Middle- and Low-Income countries, we find that workers’ remittances are much higher in Low- and Middle-income countries. The banking industries are much more concentrated in High-Income countries. Bank deposits are also significantly higher in these countries. The banking systems in these countries have more risk compared to their counterparts in other countries. Non-resident banks are more active in High-Income countries. Also, there is more interest in offshore accounts and the banks are more engaged in international transactions. When we compare high-income OECD-member countries to high-income Non-OECD-member countries, we find that the banking industries in high-income Non-OECD-member countries are much more concentrated when compared to their counterparts in High-Income OECD countries. In High-Income Non-OECD countries, non-resident banks are more active and there is more interest in offshore accounts. On the other hand, bank deposits are higher in High-Income OECD countries. But, the banks in these countries are in greater risk compared to the banks in Non-OECD countries (i.e. liquid liabilities are higher). We conclude that policymakers need to consider OECD membership and income level as determinants of a country’s banking system.
Highlights
In this paper, we examine the relation between countries’ income levels and their banking system
While the above mentioned studies focus on the direction of the causality between financial development and economic growth, there are other papers that focus on the banking systems of developed and developing countries
While the mean value of “Liquid liabilities in billions 2000 USD” is 1,430.00 for High-Income OECD countries, the corresponding value is 102.01 for High-Income Non-OECD countries (p-value of the difference=0.0002). These results show that banks in High-Income OECD countries collect more deposits when compared to banks in High-Income Non-OECD countries
Summary
We examine the relation between countries’ income levels and their banking system. The previous papers that examine the relationship between financial development (including the banking system) and economic growth have mixed results. There are papers that compare the banking systems of developed and developing countries Most of these studies compare bank concentration While some of the studies support the view that less competition (i.e. more concentration) has a stabilizing effect on the financial system, others argue that less competition has a destabilizing effect on the financial system In this current paper, we focus on nine variables on the banking system. Our study goes deeper (i.e. we examine nine variables on banking) and it covers more countries (i.e. 203 countries) when compared to the other studies that compare the banking systems around the world.
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