Institutional Quality, Trade Openness, and Financial Sector Development in Asia: An Empirical Investigation

We examine the determinants of financial sector development in Asia and the Pacific from 1995 to 2011. In terms of economic growth, over the last twenty years the region has outperformed other parts of the world and has also experienced major developments in its traditionally bank-dominated financial system since the 1997 Asian financial crisis. We apply the dynamic generalized method of moments to a panel data set of twenty-six economies in the region. The estimations were done for the whole panel as well as for subpanels of developed and developing economies. We find that better governance and institutional quality foster financial sector development in developing economies while economic growth and trade openness are key determinants of financial depth in developed economies.