Informe de desarrollo financiero 2010 wef

2010The Financial
Development Report

The Financial Development
Report 2010
World Economic Forum
Geneva, Switzerland
World Economic Forum USA Inc.
New York, USA

The terms country and nation as used in
this report do not in all cases refer to a
territorial entity that is a state as understood
by international law and practice. The terms
cover well-defined, geographically self-
contained economic areas that may not
be states but for which statistical data are
maintained on a separate and independent
basis.
World Economic Forum USA Inc.
Copyright © 2010
by the World Economic Forum USA Inc.
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the World Economic Forum.
ISBN-10: 92-95044-93-2
ISBN-13: 978-92-95044-93-7
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Contents
Contributors v
Academic Advisors vii
Preface ix
by Klaus Schwab
Foreword xi
by Kevin Steinberg
Executive Summary xiii
Part 1: Findings from the Financial 1
Development Index 2010
1.1: The Financial Development Index 2010: 3
Unifying the Narratives of Reform
by James Bilodeau and Ibiye Harry
1.2: Financial Development, Capital Flows, 31
and Capital Controls
by Howard Davies and Michael Drexler
1.3: SME Finance: What Have We Learned 49
and What Do We Need to Learn?
by Thorsten Beck
Part 2: Country/Economy Profiles 57
How to Read the Country/Economy Profiles ..............................59
List of Countries/Economies........................................................61
Country/Economy Profiles............................................................62
Part 3: Data Tables 291
How to Read the Data Tables ....................................................293
Index of Data Tables...................................................................295
Data Tables .................................................................................297
Technical Notes and Sources 369
About the Authors 379
Partner Institutes 381

v
Contributors
EDITOR
James Bilodeau
Associate Director and Head of Emerging Markets Finance
World Economic Forum USA
PROJECT TEAM
Ibiye Harry
Project Manager, World Economic Forum USA
Lawrence Chuang
Associate, World Economic Forum USA
PROJECT ADVISORS
Margareta Drzeniek Hanouz
Director, Senior Economist
Thierry Geiger
Associate Director, Economist
CONTRIBUTORS
Thorsten Beck
Professor of Economics and Chairman of the European
Banking Center, Tilburg University
Howard Davies
Managing Director, The London School of Economics and
Political Science
Michael Drexler
Global Head of Strategy, Commercial Investment Banking and
Wealth Management, Barclays
EXPERT COMMITTEE*
Chris Coles
Partner, Actis
Howard Davies
Managing Director, The London School of Economics and
Political Science
Michael Drexler
Global Head of Strategy, Commercial Investment Banking and
Wealth Management, Barclays
Nick O’Donohoe
Global Head of Research, JPMorgan Chase
Gerard Lyons
Chief Economist and Group Head of Research,
Standard Chartered
Raghuram Rajan
Professor of Finance, University of Chicago
Nouriel Roubini
Professor of Economics and International Business,
New York University and Chairman, Roubini Global Economics
Andrei Sharonov
Managing Director, Troika Dialog
Kevin Steinberg
Chief Operating Officer, World Economic Forum USA
Augusto de la Torre
Chief Economist for Latin America and the Caribbean,
The World Bank
We would like to thank Dealogic and Thomson Reuters for their
generous contribution of data for this Report.
FROM THE WORLD ECONOMIC FORUM
Kevin Steinberg, Chief Operating Officer, World Economic Forum
USA†
Max von Bismarck, Director and Head of Investors Industry†
Giancarlo Bruno, Director and Head of Financial Services
Industry†
Anuradha Gurung, Associate Director†
Trudy Di Pippo, Associate Director†
Abel Lee, Associate Director†
Kerry Wellman, Senior Community Manager†
Lisa Donegan, Community Manager†
Irwin Mendelssohn, Community Manager†
Tom Watson, Project Manager†
Isabella Reuttner, Project Manager†
Nadia Guillot, Senior Coordinator
Alexandra Hawes, Coordinator†
Takae Ishizuka, Coordinator†
Elisabeth Bremer, Coordinator†
Centre for Global Competitiveness and Performance
Jennifer Blanke, Director, Lead Economist, Head of the Centre
for Global Competitiveness and Performance
Irene Mia, Director, Senior Economist
Ciara Browne, Associate Director
Pearl Samandari, Community Manager
Roberto Crotti, Junior Quantitative Economist
We thank Hope Steele for her superb editing work and
Neil Weinberg for his excellent graphic design and layout.
We would also like to thank Chris Ryan for his assistance in
assembling data for this Report.
Contributors
*The Forum is grateful for the support of the Industry Partners who served on the Expert Committee. Any findings contained in the Report are
solely the view of the Report’s authors and do not reflect the opinions of the Expert Committee members.
†Employees of the World Economic Forum USA.

The Forum is grateful for the support of the Academic Advisors who contributed to the Report. Any findings contained in the Report are
solely the views of the Report’s authors and do not reflect the opinions of the Academic Advisors.
vii
Martin Baily
Brookings Institution
Thorsten Beck
Tilburg University
Richard Cooper
Harvard University
Erik Feyen
The World Bank
Luc Laeven
International Monetary Fund
Subir Lall
International Monetary Fund
Maria Soledad Martinez Peria
The World Bank
Sergio Schmukler
The World Bank
Luigi Zingales
University of Chicago
AcademicAdvisors
Academic Advisors

ix
Preface
When the Forum’s first Financial Development Report
was published in 2008, the world was in the midst of
a financial crisis that posed one of the single greatest
threats to global prosperity we had seen in over 70
years.Two years later, with the publication of this third
edition of The Financial Development Report, the global
community can look back with an appreciation that
concerted global action may have averted the worst of
an immediate crisis.This work is far from complete,
however, and the immediate dangers of financial insta-
bility are still present. Perhaps the most immediate con-
cern is that many developed economies must confront
severe fiscal constraints without jeopardizing a fragile
economic recovery.
The financial risks confronting the global economy
are both broader in scope and longer in term than just
those stemming from the recent crisis.The robust
growth and relative stability of emerging market
economies have been bright spots shining through
the turmoil of recent years. It is expected that the
global economy will rely on these economies to be
the primary engine of global economic growth in the
years ahead.Yet these economies in turn must rely on
financial systems that, in many instances, are less devel-
oped. It is imperative that development areas within
these financial systems be addressed to ensure that
future economic growth is not undermined: new
sources of long-term capital must be tapped to fund
much-needed infrastructure; local capital markets must
be developed to meet the expanding credit needs of
all economic sectors; and access to retail financial ser-
vices must be extended to help stimulate consumer
demand in these markets, which in turn can offset
global imbalances.
The aftermath of the financial crisis has brought a
ferment of ideas about how to respond to the crisis and
establish new models for financial systems going for-
ward.The Forum itself has hosted much of this dialogue
through its various stakeholder communities, its regional
and annual events, and its Network of Global Agenda
Councils.While it is important that these ideas be heard
and vetted, it is also increasingly important that stake-
holders move to unite around a coordinated reform
agenda that addresses all of the financial risks that could
threaten long-term economic growth. It is in this spirit
that we offer this year’s Financial Development Report, as a
comprehensive yet accessible reference tool with which
to focus priorities on the most-needed areas of financial
reform.
In the tradition of the Forum’s multi-stakeholder
approach to global issues, the creation of this Report
involved an extended program of outreach and dialogue
with members of the academic community, public fig-
ures, representatives of nongovernmental organizations,
and business leaders from across the world.This work
included numerous interviews and collaborative sessions
to discuss the findings, and their implications, of the
Index as well as possible modifications to its design.
Other complementary publications from the World
Economic Forum include The Global Competitiveness
Report,The Global Enabling Trade Report,The Global
Gender Gap Report,The Global Information Technology
Report, and The Travel & Tourism Competitiveness Report.
We would like to express our gratitude to our
industry partners and the academic experts who served
on the project’s Expert Committee: Chris Coles,
Partner,Actis; Michael Drexler, Global Head of
Strategy, Commercial Investment Banking and Wealth
Management, Barclays; Nick O’Donohoe, Global
Head of Research, JPMorgan Chase; Howard Davies,
Managing Director, London School of Economics;
Gerard Lyons, Chief Economist and Group Head of
Research, Standard Chartered; Professor Raghuram
Rajan, University of Chicago;Andrei Sharonov,
Managing Director,Troika Dialog; Kevin Steinberg,
Chief Operating Officer,World Economic Forum USA;
and Augusto de la Torre, Chief Economist for Latin
America and the Caribbean,The World Bank.We are
appreciative of our other academic advisors who gener-
ously contributed their time and ideas in helping shape
this Report. We would also like to thank James Bilodeau
at the World Economic Forum USA, editor of the
Report, for his energy and commitment to the project, as
well as the other members of the project team, includ-
ing Ibiye Harry and Lawrence Chuang.We are grateful
to Margareta Drzeniek Hanouz and Thierry Geiger for
their guidance as Project Advisors.Appreciation also
goes to the Centre for Global Competitiveness and
Performance Team, including Jennifer Blanke, Ciara
Browne, Roberto Crotti, Irene Mia, and Pearl Samandari.
Finally, we would like to thank our network of Partner
Institutes, without whose enthusiasm and hard work the
annual administration of the Executive Opinion Survey
and this Report would not be possible.
Preface
KLAUS SCHWAB
Executive Chairman, World Economic Forum

The World Economic Forum is pleased to release The
Financial Development Report 2010, the third edition
since its inaugural publication in 2008. Initiatives such as
this Report aim to enrich and focus the dialogue, among
multiple global stakeholders, that the Forum has pro-
moted through its events, Global Agenda Council
Network, and Industry Partnership Programme.The
Report represents a key ongoing initiative undertaken as
part of the Forum’s Industry Partnership Programme.
The Programme provides a platform for CEOs and
senior executives to collaborate with their peers and
an extended community of academics, leaders from
government, and experts from civil society to tackle
key issues of concern to the global community.
Unifying the narratives of reform
Financial reform continues to occupy a central place on
the global agenda. In some respects, because the urgency
of the response to the immediate financial crisis has
moderated, there is now more room for debate about
priorities for long-term reform and preferred models for
financial development in the years to come.We believe
this Financial Development Report provides an important
tool with which to ground this debate in actual meas-
ures of progress at the country level.
At the global level, while progress has been made in
many areas—such as the new capital requirements under
Basel III—many questions remain in areas such as coun-
tercyclical capital buffers and the best way to treat system-
ically important institutions. Even as multilateral rules
are drafted and agreed upon, it is vital that institutional
reform at the country level be undertaken to ensure that
new rules can be enforced and regulatory arbitrage pre-
vented.The variables in this Report help provide guid-
ance on measuring progress at the country level.
As reforms are proposed and some enacted, there is
a diversity of opinion around how they may affect the
availability and cost of capital and how this impact could
affect economic growth.The business environment in
different economies, including the tax regime, avail-
ability of talent, and cost of doing business, could also
impinge on the availability of capital.This Report includes
assessments of the business environment and availability
of different forms of capital for corporate end-users.
The G-20 and various multilateral organizations
have identified financial inclusion as a central issue on
their agenda.The ability of a financial system to provide
basic financial services—such as loans, savings accounts,
and insurance to consumers—is one of its most impor-
tant functions.A number of measures with which to
assess progress in the provision of retail financial services
are provided within the Report.
The Financial Development Report 2010
In light of the ongoing richness of debate, we offer this
year’s Report as a way to unify these different narratives
and enable stakeholders to collectively prioritize, imple-
ment, and assess reforms. Part 1 of the Report summa-
rizes this year’s Index results and related findings in
three sections. Chapter 1.1 outlines the methodology for
the Index, the academic theory and assumptions sup-
porting it, and some of the key findings from the Index
results. Chapter 1.2 provides an example of how the
Index can be used to help countries prioritize reform
efforts, focusing on the development of defenses against
volatile capital flows and a code of practice for use of
capital controls. Chapter 1.3 highlights the issue of
small- and medium-sized enterprise (SME) finance, an
example of a critical issue that must be included within
an expanded narrative of reform that addresses financial
development more broadly.
We encourage readers to delve into the detail of
Part 2: Country/Economy Profiles and Part 3: Data
Tables of the Report. The richness and breadth of the
data paint a balanced picture of the challenges and
opportunities faced by different countries.
By design, this Report must rely on data that are
available for all the economies it covers, to proxy for key
elements of financial development.This year, as every
year, it is with a degree of humility that we put forth
our findings given some of the inherent limitations of
these data, the rapidly changing environment, and the
unique circumstances of some the economies covered.
Yet, in the Report’s attempt to establish a comprehensive
framework and a means for benchmarking, we feel it
provides a useful common vantage point to unify prior-
ities and frame action.We welcome your feedback and
suggestions for how we may develop and utilize this
Report to promote the potential of financial systems as
enablers of growth and individual prosperity.
On behalf of the World Economic Forum, we
wish to particularly thank the members of the Expert
Committee, the Academic Advisors, and James Bilodeau
and Ibiye Harry for their boundless support.
xi
Foreword
Foreword
KEVIN STEINBERG
Chief Operating Officer, World Economic Forum USA

The Financial Development Report 2010 and the Financial
Development Index (FDI) on which it is based provide
a score and rank for 57 of the world’s leading financial
systems and capital markets.They analyze the drivers of
financial system development that support economic
growth in advanced and emerging economies to serve as
a tool for countries to benchmark themselves and prior-
itize areas for reform.
The Report defines financial development as the factors,
policies, and institutions that lead to effective financial interme-
diation and markets, as well as deep and broad access to capital
and financial services. In accordance with this definition,
measures of financial development are captured across
seven pillars:
1. Institutional environment
2. Business environment
3. Financial stability
4. Banking financial services
5. Non-banking financial services
6. Financial markets
7. Financial access
The FDI thus takes a comprehensive view in assess-
ing the factors that contribute to the long-term devel-
opment of financial systems; it includes but is much
broader than just measures of immediate financial
stability.
Because of this broad definition, for the top scorers
in the Index, the United States (1st) and the United
Kingdom (2nd), the very low scores in financial stability
are counterbalanced by incumbent strengths in financial
intermediation that buoy their positions in the rankings.
The two countries both show advantages in non-
banking financial services and financial markets, and
the United Kingdom also demonstrates strength in
banking financial services (based on measures of size
and efficiency—financial stability is captured elsewhere).
The business environments in both countries display
signs of deterioration, particularly in the area of
taxation.
As in last year’s Index, the economies in the top 10
are predominantly smaller (by GDP) than the members
of the G-8; this is true for 6 out of the top 10 in overall
rank (see Table 1).These smaller economies include
Hong Kong SAR (3rd), Singapore (4th),Australia (5th),
the Netherlands (7th), Switzerland (8th), and Belgium
(10th). Both Canada (6th) and Japan (9th) maintained
their overall rank from last year.
An important finding from this year’s Index results
can be seen in the context of the current economic
environment: emerging market economies are now the
primary driver of global economic growth and, at cur-
rent rates, could generate the majority of absolute GDP
growth over the next five years.Although this finding is
encouraging in many respects, it also points toward
some risks: the financial systems in many of these
countries are less developed than those in advanced
economies. On average, emerging market economies
scored 1.3 points lower than advanced economies in the
Index (see Figure 1, a comparison of GDP growth and
this year’s Index scores.)
Although financial stability has been a relative
advantage for many emerging market economies over
the last several years, their performance in other areas of
the Index may increasingly constrain economic growth
at the country and global level.The risks to economic
growth posed by these development areas can be seen
in the following critical areas:
• Long-term financing for infrastructure. Banks may
be increasingly limited in their ability to provide
the tenor and amount of financing needed to fund
significant infrastructure needs.The development of
capital markets in many emerging markets may be
necessary to fill this gap.Additionally, weaknesses in
xiii
ExecutiveSummary
Executive Summary
Table 1: Top 10 in overall Index ranking
2010 2009 2010 Change
rank rank score in score
Economy (1 to 57) (1 to 55) (1 to 7) (2010 vs. 2009)
United States 1 3 5.12 –0.01
United Kingdom 2 1 5.06 –0.22
Hong Kong SAR 3 5 5.04 +0.06
Singapore 4 4 5.03 +0.01
Australia 5 2 5.01 –0.12
Canada 6 6 4.98 +0.02
Netherlands 7 8 4.73 –0.12
Switzerland 8 7 4.71 –0.21
Japan 9 9 4.67 +0.03
Belgium 10 13 4.65 +0.15

the institutional environments of many economies
will need to be addressed to increase the willingness
of investors to commit long-term capital.
• Deep and accessible local bond markets. The local
bond markets in many Asian and Latin American
countries are not as developed as other parts of
their financial systems.This can limit the availability
of capital for important sectors, such as small- and
medium-sized enterprises (SMEs) (Chapter 1.3
discusses some of the obstacles to SME financing).
Additionally, strong local bond markets can be an
important defense against the harmful effects of
volatile capital flows (please see Chapter 1.2 for a
discussion of capital flows, capital controls, and
financial development).
• The extension of retail financial access. As seen in
many Asian and some Latin American countries,
poor access to retail financial services for consumers
may hinder efforts to stimulate local demand that
could help offset global economic imbalances.
Savings, credit (including mortgages), and insurance
can help increase and smooth the spending of con-
sumers who will be increasingly critical to sustain-
ing economic growth.
The recent financial crisis has underscored the
interconnected nature of financial systems. If weaknesses
in the institutional environments or financial stability
of global financial centers such as United States and
United Kingdom persist or worsen, this will only add
to the urgency of developing financial systems in other
countries to promote sustained economic growth
worldwide.
xiv
ExecutiveSummary
Figure 1: Absolute GDP growth vs. Financial
Development Index 2010 score
Source: GDP data taken from IMF, World Economic Outlook Database, April
2010.
$5
$6
$7
$8
$7.7 trillion
3.16
$6.5 trillion
4.45
Emerging
markets
Advanced
economies
5
4
3
2
1
AbsoluteGDPgrowth
(2010–2014,US$trillions)
OverallFDIscore
l Average FDI score n Absolute GDP growth

Part 1
Findings from the Financial
Development Index 2010

1.1:TheFinancialDevelopmentIndex2010
3
CHAPTER 1.1
The Financial Development
Index 2010: Unifying the
Narratives of Reform
JAMES BILODEAU, World Economic Forum USA
IBIYE HARRY, World Economic Forum USA
Continued global financial uncertainty has underscored
the complexity and interconnectedness of financial sys-
tems. Financial instability originally emanating primarily
from the US mortgage markets several years ago has
proceeded to manifest itself in a number of other asset
classes and regions, most recently in sovereign debt in
the euro zone.1
Economies continue to grapple with
questions of financial reform that must be considered in
tandem with other fundamental questions, such as how
to drive sustained economic growth and promote fiscal
responsibility.
This complexity is also illustrated by the degree to
which the actions of different stakeholders have im-
pacted the functioning of financial systems.The indebt-
edness of both individuals and sovereign entities, risk
management by financial institutions, the originate-and-
distribute model facilitated by the “shadow” banking
system, oversight by regulators, and the promotion of
exports through exchange rate policy by lawmakers
have all been cited as factors influencing the develop-
ment of financial systems in the last several years. Some
recent research also traces the root cause of current finan-
cial instability to broader societal and economic ques-
tions such as the failure to address income inequality
through investments in human capital and education.2
As countries move from an immediate response to
financial crisis to the implementation of longer-term
policies that will influence the shape of financial systems
for years to come, it is important to view these actions
while keeping in mind this complexity of financial sys-
tems and the factors and stakeholders that influence
them.This includes objectively assessing which measures
will most improve overall financial development over
the long term; how they will affect the different stake-
holders within financial systems; and, ultimately, how
they will further economic prosperity for all participants
in the global economy. Empirical studies concerning
financial development and growth have generally found
that cross-country differences in levels of financial devel-
opment explain a considerable portion of the cross-
country differences in growth rates of economies.3
It is in this context that the third annual Financial
Development Report aims to provide policymakers with
a common framework to identify and discuss the range
of factors that are central to the development of global
financial systems and markets. It provides the Financial
Development Index (FDI), which ranks 57 of the
world’s leading financial systems and can be used by
countries to benchmark themselves and establish pri-
orities for financial system improvement. The Financial
Development Report is published annually so that coun-
tries can continue to benchmark themselves against their
peers and track their progress over time.
In recognition of the diversity of economies cov-
ered in the FDI and the variety of financial activities
that are vital to economic growth, the FDI provides a
holistic view of financial systems. For the purposes of

this Report and the FDI, we have defined financial devel-
opment as the factors, policies, and institutions that lead to
effective financial intermediation and markets, as well as deep
and broad access to capital and financial services. This defini-
tion thus spans the foundational supports of a financial
system, including the institutional and business environ-
ments; the financial intermediaries and markets through
which efficient risk diversification and capital allocation
occur; and the results of this financial intermediation
process, which include the availability of, and access to,
capital.
The FDI relies upon current academic research in
both selecting the factors that are included and in deter-
mining its overall structure.This encompasses a variety
of measures intended to capture different dimensions of
financial stability that have been highlighted in the cur-
rent crisis. However, consistent with its purpose of sup-
porting the long-term development of financial systems
and their central role in economic growth, it also
encourages a broad analysis over a theoretical focus
on a few specific areas.With this holistic view, decision
makers can develop a balanced perspective as to which
aspects of their country’s financial system are most
important and empirically calibrate this view relative
to other countries.
Financial development and economic growth
A large body of economic literature supports the prem-
ise that, in addition to many other important factors, the
performance and long-run economic growth and wel-
fare of a country are related to its degree of financial
development. Financial development is measured by fac-
tors such as size, depth, access, and the efficiency and
stability of a financial system, which includes its markets,
intermediaries, range of assets, institutions, and regula-
tions.The higher the degree of financial development,
the wider the availability of financial services that allow
the diversification of risks.This increases the long-run
growth trajectory of a country and ultimately improves
the welfare and prosperity of producers and consumers
that have access to financial services.The link between
financial development and economic growth can be
traced back to the work of Joseph Schumpeter in the
early 20th century,4
and more recently to Ronald
McKinnon and Edward Shaw.This link is now well
established in terms of empirical evidence.5
The slow economic recovery for many countries
since the onset of the recent crisis has underscored
the negative impacts that financial systems can have on
economic growth; in general, economic recoveries after
financial crises have been shown to be much slower
than those that occur after recessions not associated with
financial crises.6
However, it is important to consider the
positive impact that broader financial development and
more dynamic financial systems can have on longer-
term economic growth as well. Research supports the
idea that countries that have experienced occasional
financial crises have, on average, demonstrated higher
economic growth than countries that have exhibited
more stable financial conditions.7
Financial innovation,
when undertaken prudently, can also be important to
effectively screen and allocate funds to new and pro-
ductive enterprises, particularly as technology evolves.8
Thus, although it is important to mitigate the short-
term impact of crises, it is also important to view
financial development in terms inclusive of, but
broader than, financial stability.
Economic theory suggests that financial markets
and intermediaries exist mainly because of two types of
market frictions: information costs and transaction costs.
These frictions lead to the development of financial
intermediaries and financial markets, which perform
multiple functions.Among these are facilitating the trad-
ing, hedging, diversification, and pooling of risk; provid-
ing insurance services; allocating savings and resources to
the appropriate investment projects; monitoring man-
agers and promoting corporate control and governance;
mobilizing savings efficiently; and facilitating the
exchange of goods and services.
Financial intermediation and financial markets
contribute directly to increased economic growth and
aggregate economic welfare through their effect on cap-
ital accumulation (the rate of investment) and on tech-
nological innovation. First, greater financial development
leads to greater mobilization of savings and its allocation
to the highest-return investment projects.This increased
accumulation of capital enhances economic growth.
Second, by appropriately allocating capital to the right
investment projects and promoting sound corporate
governance, financial development increases the rate of
technological innovation and productivity growth, fur-
ther enhancing economic growth and welfare.
Financial markets and intermediation also benefit
consumers and firms in many other ways that are not
directly related to economic growth.Access to financial
markets for consumers and producers can reduce pover-
ty, such as when the poor have access to banking ser-
vices and credit.The importance of microfinance can
be seen in this context.This access allows consumers to
smooth consumption over time by borrowing and/or
lending and stabilizes consumer welfare in the presence
of temporary shocks to wages and income. By con-
tributing to the diversification of savings and of port-
folio choices, it can also increase the return on savings
and ensure higher income and consumption opportuni-
ties. Insurance services can help mitigate a variety of
risks that individuals and firms face, thus allowing better
risk sharing of individual or even macroeconomic risks.9
The seven pillars of financial development
To understand and measure the degree of financial
development, one must consider all of the different
4

factors that together contribute to the degree of depth
and efficiency of the provision of financial services.
Conceptually, in thinking about an index that measures
the degree of financial development, the various aspects
of development can be seen as seven “pillars” grouped
into three broad categories, as indicated in Figure 1:
1. Factors, policies, and institutions: the foundational
characteristics that allow the development of finan-
cial intermediaries, markets, instruments, and
services.
2. Financial intermediation: the variety, size, depth,
and efficiency of the financial intermediaries and
markets that provide financial services.
3. Financial access: access by individuals and busi-
nesses to different forms of capital and financial
services.
The seven pillars are organized and described below
according to these three categories. (See Appendix A
for the detailed structure of the FDI and a list of all
indicators.)
Factors, policies, and institutions
This first category covers those foundational features
that support financial intermediation and the optimal
provision of financial services and includes the first three
of the seven pillars: the institutional environment, the
business environment, and the degree of financial
stability.
First pillar: Institutional environment
The institutional environment encompasses the laws and
regulations that allow the development of deep and effi-
cient financial intermediaries, markets, and services as
well as the macroprudential oversight of financial sys-
tems.This includes the overall laws, regulations, and
supervision of the financial sector, as well as the quality
of contract enforcement and corporate governance.
Economic theory proposes that a strong institution-
al environment exists to alleviate information and trans-
action costs.10
Much empirical work has tackled issues
related to the importance of institutions and their
impact on economic activity in general.The presence of
legal institutions that safeguard the interests of investors
is an integral part of financial development.11
Reforms
that bolster a country’s legal environment and investor
protection are likely to contribute to a more efficient
financial sector.12
Accordingly, we have included vari-
ables related to the degree of judicial independence and
judicial efficiency.
The recent crisis has clearly emphasized the impor-
tance of regulation at the institutional level as it relates
to financial stability and corresponding effects on the
real economy.As highlighted in the recent financial cri-
sis, central banks play a critical role in the functioning
of financial systems and this year we have included
5
Figure 1: Composition of the Financial Development Index
Source: World Economic Forum.
Factors, policies,
and institutions
1. Institutional environment
2. Business environment
3. Financial stability
Policymakers
Financial
intermediation
4. Banking financial services
5. Non-banking financial services
6. Financial markets
Financial
intermediaries
Financial access
7. Financial access
End users
of capital
Financial Development Index

measures related to central bank transparency.13
A meas-
ure of the effectiveness of regulation of securities
exchanges is also included.The degree to which coun-
tries coordinate or harmonize their regulatory regimes
internationally is also an important consideration.
However, since there is little in the way of cross-country
data that captures this in a uniform way, we are unable
to include a specific indicator for this—at least until fur-
ther research becomes available.
Better corporate governance is believed to encour-
age financial development, which in turn has a positive
impact on growth.14
Contract enforcement is also
important because it limits the scope for default among
debtors, which in turn promotes compliance.Variables
capturing these measures as they relate to the formal
transfer of funds from savers to investors are included in
the pillar.15
Inadequate investor protection leads to a
number of adverse effects, which can be detrimental to
external financing and ultimately to the development of
well-functioning capital markets.16
In general, inade-
quate enforcement of financial contracts has been found
to augment the process of credit rationing, thus hinder-
ing the overall process of growth.17
Other important aspects of the institutional environ-
ment are a country’s capital account openness and domes-
tic financial sector liberalization. Financial liberalization
generally permits a greater degree of financial depth,
which translates into greater financial intermediation
among savers and investors.This in turn increases the
monetization of an economy, resulting in a more effi-
cient flow of resources.18
Empirically, however, the
impact of capital account liberalization delivers mixed
evidence. Several studies have asserted that capital
account liberalization has no impact on growth, while
others have found a positive, and statistically significant,
impact.19
At the same time, other work asserts that the
relationship is undetermined.
Given such ambiguity over the impact of capital
account openness, it is best examined within the
context of the legal environment.The better a country’s
legal and regulatory environment, the greater the bene-
fits from capital account openness—and vice versa.
Accordingly, within the FDI we try to capture the rela-
tionship between capital account openness and the level
of legal and regulatory development, and have interacted
the variables used to measure each (see Appendix A).
The presence of both a robust legal and regulatory sys-
tem and capital account openness provides a positive
indication of the financial development of a country.We
have also interacted the capital account openness vari-
able with the level of bond market development because
of research that asserts the importance of developing
domestic bond markets in advance of full liberalization
of the capital accounts.20
(Please see Box 1 for further
discussion of capital flows and capital controls in the
context of financial development.) Assessments of
According to classic economic theory, capital flows from devel-
oped economies, which have a capital surplus, to developing
markets, which have a surplus of investment opportunities.
However, this orthodox economic view has been challenged
by a number of events. Research has also found that capital
has recently flowed from emerging economies, such as China
and the Middle East, to developed markets, such as the United
States.
Capital flows are a feature of globalization and offer
a number of worthwhile benefits. These include enabling
investors to promote the long-term allocation of resources and
providing liquidity and financing where needed. The question is
one of how to harness these benefits while mitigating potential
risks. Such risks are of particular concern for smaller
economies that are still in development. Capital flows that are
large relative to a local economy generally bring three dangers:
(1) inflation of bubbles, (2) currency mismatches, and (3) maturi-
ty or liquidity mismatches. Categories of resilience against
these risks include (1) deep local asset markets, (2) deep local
currency markets, and (3) well-developed local debt markets.
The Financial Development Index (FDI) can help
economies assess their resilience to episodes of excessive
capital flow. An economy’s FDI scores in the three aforemen-
tioned resilience categories can be aggregated into a defensive
score and mapped against its GDP (see Figure 4, Chapter 1.2). If
the GDP is small and the defensive score is also small, an econ-
omy can be potentially at risk from speculative flows. As a
second step, it can also be insightful to map the relationship
between an economy’s defensive score and its advanced mar-
ket score, which aggregates selected variables from the FDI
related to the development of more advanced asset markets.
Despite the importance of the resilience measures previously
described, they might not prevent a capital flow episode that
threatens the systemic stability of a local economy.
Consequently, there can be circumstances where measures of
capital control are required. Historical episodes show that five
types of capital controls have been employed most frequently:
(1) unremunerated reserve requirements, (2) time requirements,
(3) quantitative limits, (4) direct tax on financial transactions,
and (5) the regulation of trade between residents and non-
residents. The efficacy of a capital control will depend on the
motivation of the speculators it is supposed to deter and also
on the state of the economy in which it is implemented.
Box 1: Financial development, capital flows, and capital controls
(Please see Chapter 1.2 by Howard Davies and Michael Drexler for a full discussion of this topic.)
6

commitment to WTO trade agreements as they relate to
financial services have also been included and interacted
in a similar manner.
A similar analysis can be extended to the degree of
liberalization of the domestic financial sector.This
degree of liberalization is based on whether a country
exerts interest rate controls (either ceilings or floors),
whether credit ceilings exist, and whether foreign cur-
rency deposits are allowed. In general, the better a coun-
try’s legal and regulatory environment, the greater the
impact of domestic financial sector liberalization on a
country’s economic growth.Variables representing each
of these characteristics have been interacted to represent
this result. Recent research supports the importance of
advanced legal systems and institutions in this respect,
holding that the presence of such institutions is as vital
as having both a developed banking sector and equity
markets.21
Second pillar: Business environment
The second pillar focuses on the business environment
and considers:
• the availability of human capital—that is, skilled
workers who can be employed by the financial
sector and thus provide efficient financial services;
• the state of physical capital—that is, the physical
and technological infrastructure; and
• other aspects of the business environment, including
taxation policy and the costs of doing business for
financial intermediaries.
The creation and improvement of human capital
have been found to assist the process of economic
growth.22
Empirical evidence supports this observation
and shows positive correlations between human capital
and the degree of financial development.23
Our proxies
for the quality of human capital are related to the
enrollment levels of tertiary education.We also include
measures that reflect the quality of human capital, such
as the degree of staff training, the quality of manage-
ment schools and math and science education, and the
availability of research and training services.
Another key area is infrastructure.We capture a
basic measure of the quality of physical infrastructure,
which is important given its role in enhancing the
process of private capital accumulation and financial
depth in countries by increasing the profitability of
investment.24
However, our analysis of infrastructure
emphasizes measures of information and communication
technologies, which are particularly important to those
firms operating within a financial context because of
their data-intensive nature.
Another integral aspect of the business environment
is the cost of doing business in a country. Specifically,
research has shown that the cost of doing business is a
vital feature of the efficiency of financial institutions.
The different costs of doing business are fundamental to
assessing a country’s business environment as well as the
type of constraints that businesses may be facing.25
As
such, the better the business environment, the better the
performance of financial institutions and the higher the
degree of financial development.Variables that capture
such costs include the World Bank’s measures of the cost
of starting a business, the cost of registering property,
and the cost of closing a business. Indirect or transaction
costs are captured in variables such as time to start a
business, time to register property, and time to close a
business.
Our analysis also considers taxes as another key
constraint that businesses in the financial sector can face.
The variables in this subpillar focus on issues related to
distortionary and burdensome tax policies, reflecting
clearer consensus around the importance of these issues.
High marginal tax rates have been found to have distor-
tionary effects, so we have included a variable to capture
this. Because there is less clarity in the academic litera-
ture around the effects of absolute rates of taxation and
issues of data comparability, we have not included meas-
ures related to overall tax rates.
Third pillar: Financial stability
The third pillar addresses the stability of the financial
system.The severe negative impacts of financial instabil-
ity on economic growth can be profoundly seen in the
recent financial crisis as well as in past financial crises.
This instability can lead to significant losses to investors,
resulting in systemic banking crises, systemic corporate
crises, currency crises, and sovereign debt crises.
This pillar captures the risk of three types of crises:
currency crises, systemic banking crises, and sovereign
debt crises. For the risk of currency crises, we include
the change in real effective exchange rate, the current
account balance, a dollarization vulnerability indicator,
an external vulnerability indicator, external debt to
GDP, and net international investment position.The
external debt to GDP and net international investment
position variables are specifically applied to developing
and developed countries, respectively.
The systemic banking crises subpillar combines
measures of historic banking system instability, an assess-
ment of aggregate balance sheet strength, and measures
of the presence of “bubbles.” Historic instability is cap-
tured in a measure of the frequency of banking crises
since the 1970s; more recent banking crises are given
greater weight. Empirical research has shown that coun-
tries that have gone through systemic banking crises or
endured a high degree of financial volatility are more
susceptible to profound short-term negative impacts on
the degree of financial intermediation.26
We also capture
the degree of economic output loss associated with
crises (weighting output loss from more recent crises
7

more heavily.) A Financial Stress Index also captures the
incidence of financial stress in countries that do not
reach the proportions of a full-blown crisis.27
It is
important that prudential regulation include the estab-
lishment of uniform capital adequacy requirements, and
accordingly we have included a measurement of Tier 1
capital in this subpillar.28
Some research indicates that
quantitative capital adequacy measures are not always
accurate measures of the financial strength of banks in
developing countries.29
Accordingly, we have included a
financial strength indicator that balances quantitative
measures of balance-sheet strength with qualitative
assessments of banks’ abilities to meet their obligations
to depositors and creditors.
The last type of crisis captured within the financial
stability pillar is sovereign debt crisis.The manageability
of public debt defined as total public debt as a percent-
age of GDP is included in this pillar.The ability of
countries to pay this debt in full and in a timely manner
is captured in sovereign credit ratings, an important
proxy for the risk of such a crisis; these data were cal-
culated as an average of both local currency sovereign
credit ratings and foreign currency sovereign credit rat-
ings.A high sovereign credit rating signifies less likeli-
hood of default occasioned by a sovereign debt crisis.
Credit default swaps provide a quantitative, market-
based indicator of the ability of a country to repay its
debt. Macroprudential measures such as inflation and
GDP growth are also included, as these also influence
the ability of countries to service their debt.
The greater the risk of these crises, the greater the
likelihood that the different processes of financial inter-
mediation will be hampered, precipitating lower eco-
nomic growth rates. However, these effects of financial
stability on economic growth can be considered in
terms of a tradeoff between risk and innovation/return.
For example, a financial system that is very heavily
supervised and regulated may be very stable and never
spark a financial crisis. However, such a controlled sys-
tem would hamper the financial development and inno-
vation that increases returns, diversifies risks, and better
allocates resources to the highest-return investments.
Conversely, a financial system that is very free and inno-
vative and is very lightly regulated and supervised may
eventually become unstable and trigger credit booms
and asset bubbles that can severely affect growth,
returns, and welfare.Although there is some tradeoff
between the stability of the financial system and its
degree of innovation and sophistication, financial stabili-
ty remains an important input in the process of financial
development.
Financial intermediaries and markets
The second category of pillars measures the degree of
development of the financial sector as seen in the dif-
ferent types of intermediaries.These three pillars are
banking financial services, non-banking financial ser-
vices (e.g., investment banks and insurance firms), and
financial markets.
Consensus exists on the relationship between the
size and depth of the financial system and the supply
and robustness of financial services that are important
contributors to economic growth.30
This relationship
occurs because the size of financial markets is viewed as
an important determinant of savings and investment.31
The size (total financial assets within a country) of the
financial system also matters because the larger it is, the
greater its ability to benefit from economies of scale,
given the significant fixed costs prevailing in financial
intermediaries’ activities.A larger financial system tends
to relieve existing credit constraints.This facilitates bor-
rowing by firms and further improves the process of
savings mobilization and the channeling of savings to
investors. Given that a large financial system should allo-
cate capital efficiently and better monitor the use of
funds, improved accessibility to financing will tend to
amplify the resilience of an economy to shocks.
Thus, a deeper (total financial assets as a percentage
of GDP) financial system is an important component of
financial development as it contributes to economic
growth rates across countries.32
Measures of size and
depth have been included in each of the three financial
intermediation pillars to capture this factor.
Fourth pillar: Banking financial services
Although the previous pillar captures some of the nega-
tive impacts that an unstable banking system can have
on an economy, banks also play a vital role in supporting
economic growth.This role is captured in the fourth
pillar. Bank-based financial systems emerge to improve
acquisition of financial information and to lower trans-
action costs, as well as to allocate credit more effi-
ciently.This role is especially important in developing
economies.
The efficient allocation of capital in a financial sys-
tem generally occurs through bank-based systems or
market-based financial systems.33
Some research asserts
that banks finance growth more effectively and effi-
ciently than market-based systems, particularly in under-
developed economies where non-bank financial inter-
mediaries are generally less sophisticated.34
Research
also shows that, compared with other forms of financial
intermediation, well-established banks form strong ties
with the private sector, a relationship that enables them
to acquire information about firms more efficiently and
to persuade firms to pay their debts in a timely man-
ner.35
Advocates of bank-based systems argue that banks
that are unimpeded by regulatory restrictions tend to
benefit from economies of scale in the process of col-
lecting information and can thus enhance industrial
growth. Banks are also seen as key players in eradicating
liquidity risk, which causes them to increase investments
8

in high-return, illiquid assets and speed up the process
of economic growth.36
One of the key measures of the efficacy of the
banking system captured in this pillar is size.The larger
the banking system, the more capital can be channeled
from savers to investors.This enhances the process of
financial development, which in turn leads to greater
economic growth.These measures of size span deposit
money bank assets to GDP, M2 to GDP, and private
credit to GDP.Another key aspect of the banking sys-
tem is its efficiency. Direct measures of efficiency cap-
tured in the Index are aggregate operating ratios, such
as bank operating cost to assets and the ratio of non-
performing loans to total loans.An indirect measure of
efficiency is public ownership. Publicly owned banks
tend to be less efficient, impeding the processes of credit
allocation and channeling capital, which in turn slows
the process of financial intermediation.
Measures of operating efficiency may provide an
incomplete picture of the efficacy of the banking system
if it is not profitable.We have thus also included an
aggregate measure of bank profitability. Conversely, if
banks are highly profitable while performing poorly in
the operating measures, then this may indicate a lack of
competition along with undue and high inefficiency.
A third key aspect of the efficacy of the banking
system captured by this pillar is the role of financial
information disclosure within the operation of banks.
Policies that induce correct information disclosure and
that authorize private-sector corporate control of banks,
as well as motivate private agents to exercise corporate
control, tend to encourage bank development, opera-
tion, and stability.37
This has a positive effect on the
overall economy.
Fifth pillar: Non-banking financial services
Non-bank financial intermediaries—such as broker
dealers, traditional asset managers, alternative asset man-
agers, and insurance companies—can be both an impor-
tant complement to banks and a potential substitute for
them.Their complementary role lies in their efforts to
fill any vacuum created by commercial banks.Their
competition with banks allows both parties to operate
more efficiently in meeting market needs.Activities of
non-bank financial intermediaries include their partici-
pation in securities markets as well as the mobilization
and allocation of financial resources of a longer-term
nature—for example, in insurance activities. Because
of inadequate regulation and oversight, certain non-
banking financial services, such as securitization, played
a detrimental role in the current financial crisis as part
of the so-called shadow banking system. However,
within the context of a sound legal and regulatory
framework, they fulfill unique and vital roles as financial
intermediaries.
The degree of development of non-bank financial
intermediaries in general has been found to be a good
proxy of a country’s overall level of financial develop-
ment.38
Empirical research has found that banks as well
as non-bank financial intermediaries are larger, more
active, and more efficient in advanced economies.39
Advocates of the market-based system (i.e., non-banks)
point to the fact that it is able to finance innovative and
high-risk projects.40
There are three main areas of non-
bank financing activity that we capture in the Index:
initial public offering (IPO), merger and acquisitions
(M&A) activity, and securitization activity.
Additionally, we include a number of variables on
the insurance sector, which can facilitate trade and com-
merce by providing ample liability coverage. Insurance
also creates liquidity and facilitates the process of build-
ing economies of scale in investment, thereby improving
overall financial efficiency.41
And insurance has been
found to mobilize illiquid savings to positively affect
growth.42
Sixth pillar: Financial markets
The four major types of financial markets include bond
markets (both for government and corporate bonds),
stock markets where equities are traded, foreign
exchange markets, and derivatives markets.
Stock market liquidity is statistically significant in
terms of its positive impact on capital accumulation,
productivity growth, and current and future rates of
economic growth.43
More generally, economic theory
suggests that stock markets encourage long-run growth
by promoting specialization, acquiring and disseminating
information, and mobilizing savings in a more efficient
way to promote investment.44
Research also shows that
as countries become richer, stock markets become more
active and efficient relative to banks.45
Bond markets
have received little empirical attention, but recent
research has shown that bond markets play an important
role in financial development and the effective allocation
of capital.46
Derivatives markets are an important aspect of this
pillar because they can significantly improve risk man-
agement and risk diversification.The development of
derivatives markets can enhance the confidence of inter-
national investors and financial institutions and encour-
age these agents to participate in them. Derivatives
markets generally are small in emerging markets.The
strengthening of the legal and regulatory environment
can enhance the development of such markets.47
Financial access
This third and final category is comprised of one pillar
that represents measures of access to capital and financial
services.
Seventh pillar: Financial access
The measures represented in this last pillar span meas-
ures of access to capital through both commercial and
9

retail channels. Empirically, greater access to financial
services has been associated with the usual proxies for
financial development and the resulting economic
growth.48
The presence of financial services per se as
reflected by size and depth does not imply their accessi-
bility by the different types of users within an economy.
Thus, the presence of access becomes integral to our
analysis.
We separate our access measures within this pillar
into retail and commercial access measures in light of
the different channels (and issues) associated with each.
Commercial access includes measures such as access to
venture capital, commercial loans, and the local equity
markets. Retail access includes measures such as the
penetration of bank accounts and ATMs and access to
microfinance; these data were provided by the
Consultative Group to Assist the Poor and the
Microfinance Information Exchange.
Given the importance of small- and medium-sized
enterprises (SMEs) in driving economic growth in
many countries, the importance of financial access for
SMEs has recently been highlighted by organizations
such as the G-20. Please see Box 2 and the subsequent
chapter by Thorsten Beck for a full discussion of some
of the financial access issues faced by SMEs. Depending
on how they are defined (and they are defined differ-
ently across many countries), SMEs can have financial
needs that can be viewed from the perspective of both
retail and commercial access.There is a shortage of
global data related to SME finance, but the G-20 and
other multilateral organizations have highlighted this
need; when new data become available we will incorpo-
rate them into the Index.
Performance in the other pillars contributes to per-
formance in this pillar and to the extent of access to
financial services by end users.Accessibility, along with
the size and depth of the financial system as a whole
captured in the previous pillars, has a significant effect
on a country’s real activity, economic growth, and over-
all welfare.
Adjustments to the Financial Development Index
this year
The overall structure of the Financial Development
Index remains the same as that used in last year’s Report.
There are still seven pillars in the Index with the same
associated subpillars in each. Each of these subpillars
contains the constituent variables that make up the
Index.Appendix A lays out the complete structure and
methodological detail for the Index.
We have made some minor improvements to the
Index this year at the variable level.We have added three
indicators to enhance the banking system stability sub-
pillar.A measure of output loss during banking crises
provides an indication of the depth of past crises in
terms of their effect on overall economic output.A
Financial Stress Index indicates the degree to which a
financial system is under strain irrespective of the exis-
tence of a full-blown crisis.The inclusion of the Tier 1
capital ratio provides a measure of capital adequacy
within the banking system.We removed the manage-
ability of private debt variable from last year’s Report as
it was based on securitized debt, which did not provide
a sufficiently consistent measure of debt across all coun-
tries in our sample.
Box 2: SME finance: What have we learned and
what do we need to learn?
(Please see Chapter 1.3 by Thorsten Beck for a full discussion of this
topic.)
The availability of financing to small- and medium-sized en-
terprises (SMEs) has recently gained prominence in policy-
makers’ debates. The rising profile of this topic has been
reflected in a number of realms including discussions on
financial sector reform and the G-20’s establishment of an
SME finance committee.
Empirical research shows that SMEs are more con-
strained by financing and other institutional obstacles than
are large enterprises. These constraints are exacerbated by
weaknesses in the financial systems of many developing
countries. An access possibilities frontier can be used to
explain how difficulties in managing risk and transaction
costs involved in SME lending make financial institutions and
markets very reluctant to reach out to this group of enterpris-
es, especially in developing countries. The frontier is defined
as the maximum share of SMEs that can be served by finan-
cial institutions in a commercially viable way. The location of
the frontier in a particular economy, and thus the share of
bankable SMEs, is determined by technology as well as by
the institutional framework within which financial institutions
operate.
A number of different business models and lending
techniques, as well as policies and reforms, can entice
financial institutions and markets to lend to SMEs. Despite a
traditional focus on relationship lending, research has found
that both relationship- and transaction-based lending tech-
niques are appropriate for SME lending. With respect to
policymaking, three policy categories exist in expanding
SMEs’ access to external finance. Market-developing poli-
cies can help push out the frontier, market-enabling policies
push incumbent and new financial institutions toward the
existing frontier, while market-harnessing policies prevent
the financial system from moving beyond the frontier toward
a point of financial fragility.
The access possibilities frontier allows for a more rigor-
ous analysis of obstacles to SME finance in a specific coun-
try. However, this analysis must also take into account the
differing size and nature of SMEs across countries.
10

We have enhanced the non-banking financial serv-
ices pillar by adding some insurance-related variables.
Two variables provide better measurement of the non-
life insurance market in terms of both density and
coverage.We have also added a variable related to life
insurance coverage. Given the importance of local bond
markets as a source of capital within economies, we
also added a measure of local currency corporate bond
issuance to GDP within the bond markets subpillar.
We removed two variables related to the corporate
governance subpillar within the institutional environ-
ment pillar—official supervisory power and private
monitoring of the banking industry—because of a
lack of updated data.
We have also added two countries to the Index:
Morocco and Romania.This raises the total number
of countries covered in the Index from 55 to 57.
Accordingly, this will lower the year-on-year ranks of
countries that score below either of these countries.
The Financial Development Index 2010 rankings
The overall ranking for this year’s Financial Development
Report can be seen in Table 1, along with the 2009 rank-
ing, the Index score, and the change in score from last
year. Looking broadly across the results for the 57 coun-
tries covered in the Index, there are some overall trends
that emerge.
Overall trends in 2010 rankings
In comparing Index scores from 2009 and 2010, we see
a fairly even split between countries that have advanced
and those that have declined.The top-ranked countries
within the Index do not change significantly, although
the United States does take the top spot from the
United Kingdom (2nd); the US score remains essentially
unchanged from last year, while the United Kingdom’s
drops the most of any country within the top 10. It is
only very minor score differentials that separate the
United Kingdom from the next five countries that score
below it—Hong Kong, Singapore,Australia, Canada, and
the Netherlands.
In terms of the rest of the top 20, Denmark shows
the biggest decline, falling from 10th to 16th place.
Malaysia achieves a significant increase, moving from
22nd to 17th place, earning its place as the only emerg-
ing market in the top 20 of the Index.
All of the BRIC country rankings either improve
slightly or stay the same. China shows the biggest
advance, moving up four spots to 22nd place. Brazil
(34th) moves up two spots, India (37th) one spot, and
Russia stays the same at 40th place.
As with past years, there can be considerable varia-
tion across the seven pillars for specific countries, as can
be seen in the pillar results in Table 2. For instance,
Sweden, Norway, and Denmark all achieve top ranks in
the Institutional environment pillar (2nd, 3rd, and 4th
Table 1: The Financial Development Index 2010
rankings: Comparison with 2009
2010
2010 2009 score Change
Country/Economy rank rank (1–7) in score
United States 1 3 5.12 –0.01
United Kingdom 2 1 5.06 –0.22
Hong Kong SAR 3 5 5.04 +0.06
Singapore 4 4 5.03 +0.01
Australia 5 2 5.01 –0.12
Canada 6 6 4.98 +0.02
Netherlands 7 8 4.73 –0.12
Switzerland 8 7 4.71 –0.21
Japan 9 9 4.67 +0.03
Belgium 10 13 4.65 +0.15
France 11 11 4.63 +0.06
Sweden 12 14 4.60 +0.11
Germany 13 12 4.49 –0.05
Spain 14 15 4.42 +0.02
Norway 15 17 4.31 –0.06
Denmark 16 10 4.30 –0.34
Malaysia 17 22 4.20 +0.23
Ireland 18 16 4.20 –0.19
Austria 19 18 4.20 –0.09
Finland 20 19 4.12 –0.12
United Arab Emirates 21 20 4.03 –0.18
China 22 26 4.03 +0.16
Bahrain 23 27 4.00 +0.15
Korea, Rep. 24 23 4.00 +0.09
Italy 25 21 3.95 –0.03
Saudi Arabia 26 24 3.87 –0.02
Israel 27 28 3.85 +0.16
Kuwait 28 30 3.69 +0.07
Jordan 29 25 3.65 –0.24
Chile 30 31 3.53 –0.06
South Africa 31 32 3.53 +0.05
Brazil 32 34 3.53 +0.06
Czech Republic 33 33 3.46 –0.02
Thailand 34 35 3.37 +0.03
Poland 35 39 3.33 +0.06
Slovak Republic 36 37 3.30 0.00
India 37 38 3.24 –0.05
Egypt 38 36 3.24 –0.09
Panama 39 29 3.22 –0.41
Russian Federation 40 40 3.21 +0.05
Morocco 41 n/a 3.20 n/a
Turkey 42 44 3.18 +0.15
Mexico 43 43 3.07 +0.01
Romania 44 n/a 3.05 n/a
Hungary 45 41 3.04 –0.04
Vietnam 46 45 3.03 +0.04
Colombia 47 46 3.02 +0.08
Peru 48 42 3.01 –0.06
Kazakhstan 49 47 2.98 +0.05
Philippines 50 50 2.97 +0.14
Indonesia 51 48 2.90 0.00
Argentina 52 51 2.78 +0.01
Ukraine 53 53 2.76 +0.05
Pakistan 54 49 2.62 –0.23
Bangladesh 55 54 2.55 –0.02
Venezuela 56 55 2.55 +0.03
Nigeria 57 52 2.43 –0.29
11

Country/Economy Rank Score
United States 1 5.12
United Kingdom 2 5.06
Hong Kong SAR 3 5.04
Singapore 4 5.03
Australia 5 5.01
Canada 6 4.98
Netherlands 7 4.73
Switzerland 8 4.71
Japan 9 4.67
Belgium 10 4.65
France 11 4.63
Sweden 12 4.60
Germany 13 4.49
Spain 14 4.42
Norway 15 4.31
Denmark 16 4.30
Malaysia 17 4.20
Ireland 18 4.20
Austria 19 4.20
Finland 20 4.12
United Arab Emirates 21 4.03
China 22 4.03
Bahrain 23 4.00
Korea, Rep. 24 4.00
Italy 25 3.95
Saudi Arabia 26 3.87
Israel 27 3.85
Kuwait 28 3.69
Jordan 29 3.65
Chile 30 3.53
South Africa 31 3.53
Brazil 32 3.53
Czech Republic 33 3.46
Thailand 34 3.37
Poland 35 3.33
Slovak Republic 36 3.30
India 37 3.24
Egypt 38 3.24
Panama 39 3.22
Russian Federation 40 3.21
Morocco 41 3.20
Turkey 42 3.18
Mexico 43 3.07
Romania 44 3.05
Hungary 45 3.04
Vietnam 46 3.03
Colombia 47 3.02
Peru 48 3.01
Kazakhstan 49 2.98
Philippines 50 2.97
Indonesia 51 2.90
Argentina 52 2.78
Ukraine 53 2.76
Pakistan 54 2.62
Bangladesh 55 2.55
Venezuela 56 2.55
Nigeria 57 2.43
1st pillar: Institutional environment
Singapore 1 6.08
Sweden 2 6.05
Norway 3 5.88
Denmark 4 5.88
Canada 5 5.87
Finland 7 5.78
Germany 8 5.78
Netherlands 9 5.76
Switzerland 11 5.66
Austria 12 5.66
Belgium 13 5.59
Ireland 15 5.55
Japan 16 5.54
France 17 5.51
Australia 18 5.47
Israel 19 5.13
Malaysia 20 5.05
Bahrain 21 5.01
Spain 22 4.96
Hungary 24 4.59
Jordan 25 4.47
Romania 26 4.47
Chile 27 4.46
Italy 30 4.32
Thailand 31 4.32
Panama 32 4.28
Korea, Rep. 34 4.11
China 35 4.08
Poland 36 4.04
Kuwait 37 3.87
Egypt 38 3.85
Turkey 39 3.82
Peru 41 3.67
Philippines 42 3.64
Nigeria 43 3.63
Brazil 44 3.61
Vietnam 45 3.58
Indonesia 46 3.54
Colombia 47 3.52
Mexico 48 3.51
Morocco 49 3.37
Kazakhstan 50 3.23
India 51 3.21
Argentina 52 3.21
Pakistan 54 2.94
Ukraine 55 2.83
Bangladesh 56 2.53
Venezuela 57 2.34
2nd pillar: Business environment
Sweden 1 5.99
Singapore 2 5.91
Finland 4 5.87
Switzerland 5 5.80
Denmark 6 5.79
Canada 7 5.72
Netherlands 8 5.66
Norway 9 5.62
France 10 5.56
Belgium 11 5.54
Germany 12 5.51
Australia 13 5.48
Bahrain 14 5.45
Austria 16 5.37
Ireland 18 5.36
Korea, Rep. 19 5.33
Japan 20 5.13
Spain 23 4.87
Italy 24 4.76
Hungary 25 4.75
Romania 26 4.74
Turkey 29 4.62
Malaysia 30 4.59
Chile 31 4.53
Kuwait 32 4.51
Israel 33 4.45
Poland 35 4.42
Colombia 36 4.33
Thailand 37 4.29
China 38 4.26
Kazakhstan 39 4.16
Panama 40 4.14
Morocco 41 4.02
Argentina 42 4.02
Jordan 43 3.96
Ukraine 44 3.94
Mexico 46 3.90
Peru 47 3.83
Egypt 48 3.81
Brazil 49 3.80
Pakistan 50 3.60
Vietnam 51 3.47
India 52 3.35
Philippines 53 3.34
Indonesia 54 3.22
Venezuela 55 3.07
Nigeria 56 2.83
Bangladesh 57 2.80
3rd pillar: Financial stability
Saudi Arabia 1 6.11
Malaysia 3 5.68
Singapore 4 5.66
Switzerland 5 5.64
Chile 7 5.38
Norway 8 5.37
Australia 9 5.21
Brazil 10 5.15
France 11 5.13
Finland 12 5.09
Canada 13 5.03
Mexico 15 4.98
Morocco 16 4.95
China 17 4.93
Kuwait 18 4.91
Belgium 19 4.83
Peru 20 4.82
Austria 21 4.80
Bahrain 23 4.73
Germany 24 4.72
Thailand 25 4.71
Denmark 26 4.67
Sweden 27 4.62
Poland 29 4.55
Bangladesh 30 4.52
Netherlands 31 4.51
Israel 32 4.47
Japan 33 4.46
Colombia 34 4.44
Egypt 35 4.39
Indonesia 36 4.39
Philippines 37 4.38
Italy 38 4.29
Venezuela 40 4.25
Jordan 41 4.20
Korea, Rep. 43 4.15
Panama 44 4.09
India 45 4.03
Spain 47 3.94
Vietnam 48 3.87
Kazakhstan 49 3.82
Romania 50 3.77
Turkey 51 3.70
Pakistan 52 3.65
Ireland 53 3.60
Argentina 54 3.24
Ukraine 55 3.13
Nigeria 56 3.07
Hungary 57 2.89
Table 2: Financial Development Index 2010
FACTORS, POLICIES, AND INSTITUTIONSOVERALL INDEX
12

4th pillar: Banking
financial services
Netherlands 2 5.34
Spain 4 5.24
Japan 5 5.17
Ireland 6 5.07
Australia 7 5.06
China 8 4.91
Belgium 9 4.88
Sweden 10 4.81
Canada 11 4.76
Malaysia 12 4.70
Singapore 13 4.64
Bahrain 14 4.61
Switzerland 15 4.52
Norway 16 4.33
Germany 17 4.33
Austria 18 4.21
Denmark 19 4.19
Israel 21 4.15
Italy 22 4.13
France 23 4.09
Finland 24 4.08
Panama 25 4.03
Jordan 26 4.03
Korea, Rep. 28 3.96
Kuwait 30 3.73
Morocco 32 3.63
Thailand 33 3.55
Vietnam 35 3.49
Chile 37 3.24
Brazil 38 3.22
Poland 39 3.13
Turkey 40 3.07
India 41 3.06
Egypt 42 3.03
Argentina 43 2.93
Kazakhstan 44 2.86
Bangladesh 45 2.77
Philippines 46 2.75
Peru 47 2.73
Pakistan 48 2.69
Colombia 49 2.65
Ukraine 50 2.62
Indonesia 51 2.61
Mexico 52 2.59
Nigeria 53 2.43
Venezuela 54 2.40
Hungary 55 2.21
Romania 56 2.11
5th pillar: Non-banking
financial services
Canada 3 4.49
China 4 4.45
Korea, Rep. 6 4.15
Japan 7 4.14
Australia 8 3.96
Netherlands 9 3.65
Spain 10 3.64
Singapore 11 3.61
Brazil 12 3.56
India 13 3.53
Germany 14 3.43
France 15 3.39
Ireland 16 3.18
Malaysia 18 3.17
Switzerland 20 2.75
Italy 21 2.70
Kazakhstan 22 2.55
Belgium 23 2.55
Ukraine 24 2.48
Argentina 25 2.48
Sweden 26 2.40
Poland 27 2.37
Jordan 29 2.30
Denmark 30 2.27
Israel 31 2.21
Philippines 32 2.17
Egypt 33 2.14
Norway 34 2.13
Finland 35 2.12
Indonesia 36 2.07
Colombia 37 2.06
Bahrain 38 1.99
Mexico 39 1.98
Austria 40 1.96
Turkey 41 1.90
Morocco 42 1.89
Chile 43 1.86
Venezuela 45 1.70
Panama 46 1.65
Vietnam 47 1.65
Peru 48 1.63
Thailand 49 1.60
Hungary 50 1.52
Kuwait 52 1.44
Romania 53 1.44
Nigeria 55 1.25
Pakistan 56 1.25
Bangladesh 57 1.12
6th pillar: Financial markets
Singapore 2 5.08
Switzerland 3 5.02
Japan 5 4.84
Australia 6 4.68
France 7 4.56
Netherlands 8 4.51
Kuwait 9 4.41
Germany 10 4.31
Canada 12 4.30
Belgium 13 4.07
Spain 14 4.00
Italy 15 3.90
Denmark 16 3.78
Sweden 17 3.64
Korea, Rep. 18 3.46
Jordan 19 3.34
Finland 20 3.32
Austria 21 2.88
Israel 22 2.82
Ireland 23 2.82
India 24 2.81
Malaysia 25 2.61
Norway 26 2.60
Hungary 29 2.24
China 30 2.14
Venezuela 31 2.13
Thailand 32 2.05
Brazil 34 1.93
Pakistan 36 1.90
Philippines 37 1.88
Egypt 38 1.87
Turkey 39 1.87
Romania 40 1.85
Poland 41 1.76
Bahrain 42 1.74
Kazakhstan 43 1.71
Chile 44 1.71
Morocco 45 1.63
Mexico 47 1.59
Ukraine 48 1.56
Vietnam 50 1.45
Peru 51 1.45
Indonesia 52 1.44
Argentina 53 1.40
Colombia 54 1.35
Nigeria 55 1.21
Panama 56 1.11
Bangladesh 57 1.01
7th Pillar: Financial access
Australia 1 5.22
Belgium 3 5.07
Saudi Arabia 4 4.73
Canada 6 4.67
Sweden 7 4.65
Austria 8 4.51
Bahrain 9 4.48
Norway 11 4.27
Spain 12 4.27
Singapore 13 4.26
France 14 4.19
Ireland 16 3.82
Israel 17 3.74
Vietnam 18 3.72
Netherlands 19 3.69
Malaysia 20 3.63
Egypt 21 3.61
Italy 22 3.59
Chile 23 3.56
Switzerland 24 3.56
Denmark 25 3.52
China 26 3.44
Brazil 27 3.42
Japan 28 3.38
Germany 29 3.34
Turkey 31 3.29
Panama 32 3.27
Jordan 34 3.22
Bangladesh 35 3.12
Thailand 36 3.11
Hungary 37 3.05
Poland 38 3.05
Indonesia 39 3.02
Romania 40 3.01
Kuwait 41 2.99
Mexico 42 2.95
Peru 44 2.93
Morocco 45 2.90
Korea, Rep. 46 2.86
Colombia 47 2.81
Ukraine 48 2.77
India 49 2.72
Philippines 50 2.65
Finland 51 2.58
Nigeria 52 2.55
Kazakhstan 53 2.55
Pakistan 55 2.32
Argentina 56 2.19
Venezuela 57 1.97
Table 2: Financial Development Index 2010 (cont’d.)
FINANCIAL INTERMEDIATION FINANCIAL ACCESS
13

places, respectively) but do not make the top 10 in
either the non-banking financial services pillar or the
financial markets pillar. Similarly, some emerging-market
economies achieve high scores in financial stability. In
Table 3 one sees that 8 of the top 20 economies in the
financial stability pillar are emerging markets.
Many developing economies entered the recent
downturn with much stronger macroeconomic and
financial fundamentals than they had in previous finan-
cial crises.This included lower liability dollarization,
lower fiscal and private debt, and a better aggregate
balance sheet for the financial services sector. For many
countries, such as Brazil, this was the result of effective
macroeconomic and financial policy in the wake of past
crises, as well as generally favorable economic conditions
that included higher commodity prices and strong capi-
tal inflows in the period preceding the crisis.
However, it is important not to confuse financial
stability as measured in the third pillar of the Index with
broader financial system development as measured in the
overall Index.The broader Index looks at many different
and often complex factors that support the long-term
development of the financial systems it assesses. Financial
stability is only part of the assessment of how well
financial systems in these countries contribute to overall
economic growth by diversifying risks and efficiently
allocating capital to those who most need it.Thus, we
see that many of those economies that do perform well
in the financial stability pillar do not perform nearly as
well in other pillars in the Index.
For some developing countries, which perform
relatively well in this pillar but poorly in others, this
result may represent the relative lack of integration and
development of their financial intermediaries, which
limit their exposure to the global financial turmoil.As
described previously in this chapter, in some instances
financial stability may imply a tradeoff with healthy
risk-taking or the efficient allocation of capital to the
highest-return investments.Also, notably, the risks that
can stem from a lack of financial development are
broader in scope than financial crises or immediate
financial instability.To illustrate this point further, we
will look at the relationship between economic growth
and financial development.
Financial development and economic growth
In Figure 2, one sees a fairly strong correlation between
financial development and GDP per capita.As discussed
earlier in this chapter, the link between economic
growth and financial development is well established
in the academic literature.
A potentially more surprising finding can be
observed when one considers the current global eco-
nomic environment. In the wake of the recent financial
crisis, many emerging-market economies have demon-
strated highly resilient and robust economic growth,
particularly when compared with that of developed
countries.The implication of this finding as it relates to
financial development can be seen in Figure 3.We have
plotted the 57 countries covered by the Index in terms
of the compound annual growth rate (CAGR) of their
GDP and their overall Index score.While the correla-
tion is not as tight as it is with GDP per capita, the basic
conclusion is still obvious: many of the highest-growth
economies also have the least-developed financial
systems.
The implication of this finding for individual coun-
tries is clear, and is one that this Report has aimed to
address since its inception: countries must take a holistic
approach in the assessment and improvement of their
financial systems so they can continue to support eco-
nomic growth.Yet there are also broader implications for
the global economy in light of the current fragile eco-
nomic recovery. In Figure 4 we have used IMF forecasts
of nominal GDP from 2010 to 2014 to create an esti-
mate of the absolute amount of GDP growth in emerg-
ing markets (US$7.7 trillion) vs. advanced economies
(US$6.5 trillion) over the next five years. By this rough
estimate, approximately 54 percent of global economic
growth in the next five years could come from emerging
markets. By contrast, the average FDI score for emerg-
ing markets is 3.16 vs. 4.45 for advanced economies.
Thus, in broadest terms the global economic recov-
ery will be disproportionately affected by the perform-
ance of less-developed financial systems in emerging-
market economies.Although many of these economies
demonstrated a high degree of financial stability through
the recent financial crisis, there could be other potential
risks for other aspects of their financial systems.A
review of regional results of this year’s FDI suggests
what some of these risks might be.
Table 3: Financial stability: Top 20 economies
2010
rank Economy Score
1 Saudi Arabia 6.11
2 Hong Kong SAR 5.75
3 Malaysia 5.68
4 Singapore 5.66
5 Switzerland 5.64
6 United Arab Emirates 5.48
7 Chile 5.38
8 Norway 5.37
9 Australia 5.21
10 Brazil 5.15
11 France 5.13
12 Finland 5.09
13 Canada 5.03
14 Slovak Republic 4.98
15 Mexico 4.98
16 Morocco 4.95
17 China 4.93
18 Kuwait 4.91
19 Belgium 4.83
20 Peru 4.82
14

Figure 2: GDP per capita vs. Financial Development Index 2010
Source: GDP data taken from IMF, World Economic Outlook Database, April 2010.
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
2
3
4
5
6
R2
= 0.63
FDI2010score
GDP per capita 2009 (US dollars)
Figure 3: 2005–09 GDP CAGR vs. Financial Development Index 2010 score
Note: CAGR = compound annual growth rate.
2 3 4 5 6
–2
0
2
4
6
8
10
R2
= 0.26
2005–09GDPCAGR
Overall FDI score
15

Asian financial development and economic growth
Figure 5 shows a summary of the performance of Asian
economies (excluding Japan) across the seven pillars of
the FDI. China, India, and Hong Kong are broken out
separately, while the remaining Asian countries are aver-
aged together, weighted by GDP. As a well-established
global financial center, Hong Kong generally performs
significantly better than other countries. Financial sta-
bility is commonly a relative strength for all these
economies.
Some of the weaker pillar scores, however, begin to
reveal some potential risks that these financial systems
might pose for economic growth, both in the region
and globally. Relatively weak scores in the financial mar-
kets pillar and non-banking financial services pillar may
indicate an inability of capital markets to serve critical
financing needs in the future. In particular, scores in the
bond market subpillar were low in many of these coun-
tries.As the credit needs of companies in the region
continue to expand, the ability to tap local bond mar-
kets may become critically important.As described in
Chapter 1.2, deep local bond markets can also provide
an important bulwark against volatile cross-border
capital flows.
Many Asian countries have highlighted the critical-
ity of investing in infrastructure to support continued
economic growth. In many of these economies, the abil-
ity of banks to provide the tenor of financing needed to
support long-term investments in infrastructure is lim-
ited in the face of expanding need. Public investment
in infrastructure may also diminish as the provisions of
stimulus packages begin to subside.A lack of deep local
bond markets could mean the absence of a critical
source of long-term financing.
Some of these weaknesses appear to translate into
low scores for financial access in some Asian countries,
because corporations indicate difficulty obtaining
financing through the capital markets relative to loans or
private credit. Retail financial access for consumers is
also an area of weakness for many of these economies.
The ability of Asian economies to stimulate domestic
demand could be hindered by limited access to savings
and demand accounts, consumer credit, mortgages, and
insurance.This in turn could affect the potential for
Asian consumer demand to offset global economic
imbalances that could threaten economic growth.
Latin American financial development and economic
growth
A summary of the performance of Latin American
countries across the seven pillars can be seen in Figure 6.
Brazil and Mexico are broken out separately, while the
other Latin American countries are averaged together,
weighted by GDP. There appears to be a relatively high
degree of uniformity in the performance of countries
across the pillars.As with the Asian economies, financial
stability is a clear strength.
By contrast, performance in the financial markets
and non-banking financial services pillars is relatively
low. (Brazil scored higher than other countries in the
non-banking financial services pillar because of a very
high level of IPO activity.) The development of deep
Figure 4: Absolute GDP growth vs. Financial Development Index 2010 score
$5
$6
$7
$8
$7.7 trillion
3.16
$6.5 trillion
4.45
Emerging markets Advanced economies
5
4
3
2
1
AbsoluteGDPgrowth(2010–2014,US$trillions)
OverallFDIscore
l Average FDI score n Absolute GDP growth
16

Figure 5: Asian performance across pillars
Note: Summary of results for Asian countries, excluding Japan. Rest of Asia consists of Bangladesh, Indonesia, Kazakhstan, Korea, Rep., Malaysia, Pakistan, the
Philippines, Singapore, and Vietnam, with results weighted by GDP.
0
1
2
3
4
5
6
7
Pillar 1
Institutional
environment
Pillar 2
Business
environment
Pillar 3
Financial
stability
Pillar 4
Banking
financial
services
Pillar 5
Non-banking
financial
services
Pillar 6
Financial
markets
Pillar 7
Financial
access
FDI2010score
n China
n India
n Hong Kong SAR
n Rest of Asia
Figure 6: Latin American performance across pillars
Note: Rest of Latin America consists of Argentina, Chile, Colombia, Panama, Peru, and Venezuela, with results weighted by GDP.
0
1
2
3
4
5
6
7
Pillar 1
Institutional
environment
Pillar 2
Business
environment
Pillar 3
Financial
stability
Pillar 4
Banking
financial
services
Pillar 5
Non-banking
financial
services
Pillar 6
Financial
markets
Pillar 7
Financial
access
FDI2010score
n Brazil
n Mexico
n Rest of Latin America
17

local markets can be important to ensure that all sectors
within these economies are served. Research has shown
that in the absence of deep local markets, there are seg-
ments of the economy, particularly SMEs, that may not
be able to access capital as easily as larger corporations.49
Given that on average SMEs contribute 29 percent to
formal GDP in emerging markets, this could be a key
constraint to economic growth in the region.50
Similar to Asia, investment in infrastructure will be
essential to support the continued pace of economic
growth in Latin America. Local bond markets can pro-
vide an important source of disciplined long-term
capital to augment funding by banks and national
development banks such as BNDES (Brazilian
Development Bank).
Unlike Asian economies, Latin American economies
were not as weak in financial access as in the other pil-
lars.This was in part because of stronger scores with
respect to retail finance. However, access to commercial
finance proved weaker, particularly in Mexico where
severe constraints to many forms of capital—including
venture capital, private credit, loans, and equity markets—
exist.Although these Latin American economies exhibit
a high degree of financial stability, a limited availability
of capital could pose a major risk to economic growth
over the longer term.
Financial development risks in the United States and
United Kingdom
The United States and United Kingdom hold the num-
ber one and two spots in the FDI rankings, respectively.
The score of the United States remains nearly stagnant
and that of the United Kingdom actually goes down;
both countries’ performance is uneven across the differ-
ent pillars. In Table 4 we have summarized the perform-
ance of these two global financial centers.As in past
years, their top rankings are driven primarily by robust
performances in financial intermediation; both show
strength in non-banking financial services and financial
markets, and the United Kingdom shows a continued
advantage in banking (which, as noted previously,
includes measures of size and efficiency—financial
stability is captured elsewhere).
Their solid performances in financial intermedia-
tion contrasts with weak scores in other areas—in
Table 4 we have highlighted the pillars in which they
rank lower than 10. Financial stability remains a key
concern for these countries, which rank toward the bot-
tom of the Index. Other low scores indicate additional
areas that may be of concern over the longer term.The
business environment in both countries has deteriorated,
in large part because of poor performance with respect
to taxation. Legal and regulatory issues are a drag on the
institutional environment in the United States, and rela-
tively low efficiency pulls down banking performance in
the country.
We provide further detail on these countries later in
this chapter, but highlight some general issues here to
illustrate the broader risks that they might pose to global
economic growth. If the performance of these global
financial centers trends downward, it will heighten the
urgency of financial systems in emerging markets to
provide the effective financial intermediation and access
to capital that supports economic growth.Additionally,
the global nature of these two financial centers means
that they can, in some respects, serve as bellwethers for
financial systems elsewhere. Regulatory consistency and
coordination is more and more important in today’s
increasingly interconnected financial markets. If these
pre-eminent global financial centers adopt policies that
are inconsistent with the long-term development and
improved performance of financial systems—or, con-
versely, if they fail to take needed actions—then their
positive influence as models for financial systems else-
where would be compromised.
Regional analysis
While some high-level trends were highlighted earlier,
it is at the country level that some of the potentially
most useful findings from this Report can be seen.The
Country Profiles contained in Part 2 provide detailed
information with which to undertake this analysis.A
summary of highlights drawn from these profiles is pre-
sented below by region.
EUROPE AND NORTH AMERICA
The United States achieves top standing in the
Financial Development Index this year, although its
overall score does not change relative to 2009.The
United States continues to display a mix of contrast-
ing strengths and weaknesses across the seven pillars.
Strengths exist in financial intermediation, particularly
with respect to non-banking financial services (1st) and
financial markets (1st).This includes M&A activity (2nd)
and securitization (1st); the impact of the systemic risk
potentially created by some of these activities is not cap-
tured in the non-banking financial services pillar, but
rather in the financial stability pillar.The United States
has deep and active financial markets across the four
types captured in the Index. Size is an important com-
ponent of performance across these markets, but indica-
tors of activity such as stock market turnover (2nd),
stock market value traded (2nd), and spot foreign
exchange turnover (2nd) are also strengths. Financial
stability continues to be an area of great challenge for
the United States, where it achieves a low overall score
(39th). Particular weakness is evident in banking system
stability (52nd) and currency stability (41st) measures.
The banking system in general also exhibits signs of
difficulty, with relatively low scores in size (19th) and
18

efficiency (38th).Areas with a margin for improvement
in the business environment include the distortive effect
of taxes and subsidies on competition (46th) and the
quality of math and science education (30th).
The United Kingdom falls to 2nd place in the
Index, accompanied by a decrease in its overall score.
The country demonstrates contrasting strengths and
weaknesses in the pillars similar to the contrast seen in
the United States. Its financial intermediation pillars
show the greatest strength, offsetting drawbacks in other
areas.The United Kingdom’s poor performance in
financial stability (46th) is particularly driven by low
scores in banking system stability (54th) and currency
stability (45th).The country achieves top standing for
the size of its banking system, though it performs much
less well with respect to its efficiency (26th). Foreign
exchange (1st) and derivatives (1st) markets are areas of
particular strength within financial markets (4th).The
United Kingdom came in 3rd with respect to insurance,
achieving high marks in indicators such as life (3rd) and
non-life insurance density (4th). M&A activity (1st) is an
area of strength across measures of transaction value and
number of M&A deals; securitization is also quite strong
(2nd).Although the UK institutional environment is
fairly positive overall (6th), it demonstrates a need for
improvement across areas related to regulation and cor-
porate governance; this includes the centralization of
economic policymaking (46th), the burden of govern-
ment regulation (32nd), and the strength of auditing and
reporting standards (14th).Taxation (29th) is also a par-
ticular area of difficulty, as indicated by the country’s
high marginal tax rates and the distortive effect of taxes
and subsidies on competition.
Canada maintains its 6th-place ranking in the FDI
with a solid performance across all pillars of the Index.
Non-banking financial services is a particular asset;
Canada comes in 3rd, showing strength across the meas-
ures of securitization, IPO, and M&A activity.The coun-
try also demonstrates a good performance in the other
two financial intermediation pillars, banking financial
services (11th) and financial markets (12th). Despite its
degree of economic integration with the United States,
Canada continues to show clear divergence with respect
to financial stability, where it comes in 13th.The stabili-
ty of its banking system (8th) is a particular strength
within this pillar, although it is partially offset by an
inferior performance in currency stability (37th). In
terms of its institutional environment, Canada is consis-
tently solid across measures of corporate governance and
financial sector liberalization. Potential areas of improve-
ment in the business environment pillar include the dis-
tortive effect of taxes and subsidies on competition
(23rd) and marginal tax variation (27th).
The Netherlands rises one rank this year to 7th
place, delivering positive results across most of the FDI
pillars. One clear area of weakness is demonstrated in
the financial stability pillar (31st), where banking system
stability exhibits a particularly poor performance (45th).
The Netherlands scores high across all three of the
financial intermediation pillars: financial markets (8th)
and banking and non-banking financial services (2nd
and 9th, respectively).Within these pillars, the size of the
Dutch banking system (3rd) is an apparent strength, as is
the robust nature of Dutch equity and bond markets
(1st and 2nd). In addition to financial stability, a second
area in need of improvement exists in the financial
access pillar, where the Netherlands performs relatively
poorly on measures of commercial access (35th).
Neighboring Belgium has a weaker score in non-
banking financial services (23rd), but outperforms the
Netherlands in financial stability (19th) and financial
access (3rd). Belgium’s strong standing in the latter pillar
particularly reinforces its overall rank of 10th place.
Switzerland ranks 8th in the overall Index, with
notably strong scores in business environment and finan-
cial markets.Although the country feels the effects of
the recent crisis, it nonetheless performs very well with
respect to overall financial stability (5th). Potential areas
of improvement within the Swiss institutional environ-
ment include contract enforcement and the extent of
financial sector liberalization. Robust equity (2nd) and
foreign exchange (5th) markets drive Switzerland’s
strong performance in the financial markets pillar (3rd).
The size of its banking system is another source of
strength (7th), although opportunities for improvement
Table 4: Year-over-year changes in the Financial Development Index rank and score
2010 2009–10 2010 2009–10 2010 2009–10 2010 2009–10
FDI rank rank change FDI score score change FDI rank rank change FDI score score change
Pillar 1: Institutional environment 6 +9 5.79 +0.25 14 –3 5.58 –0.06
Pillar 2: Business environment 15 –3 5.45 –0.18 17 –7 5.37 –0.33
Pillar 3: Financial stability 46 –9 3.99 –0.58 39 –1 4.26 –0.30
Pillar 4: Banking financial services 1 +1 5.36 +0.03 27 –7 4.01 –0.20
Pillar 5: Non-banking financial services 2 –1 5.51 –0.85 1 +1 6.07 +0.14
Pillar 6: Financial markets 4 –2 5.02 –0.50 1 0 5.83 +0.18
Pillar 7: Financial access 10 +6 4.30 +0.28 5 +7 4.70 +0.51
Overall Index 2 –1 5.06 –0.22 1 +2 5.12 –0.01
Note: Data in blue bold indicate pillars where the rank is lower than 10.
UNITED KINGDOM UNITED STATES
19

Informe de desarrollo financiero 2010 wef

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