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June 2000 - To improve on the low level and low efficiency of Brazil's financial intermediation (and hence economic growth), Brazil needs reforms leading to a more efficient judicial sector, better enforcement of contracts, stronger rights for creditors, stronger accounting standards and practices, and a legal and regulatory framework that facilitates the exchange of information about borrowers. Reforms to improve both the level and the efficiency of financial intermediation in Brazil should be high on Brazilian policymakers' agendas, because of the financial sector's importance to economic growth. This means that Brazil must also improve the legal and regulatory environment in which its financial institutions operate. Brazil is weak in important components of such an environment: the rights of secured and unsecured creditors, the enforcement of contracts, and the sharing of credit information among intermediaries. Recent reforms, such as the extension of alienacao fiduciaria to housing, the introduction of cedula de credito bancario, the legal separation of principal and interest, and improvements in credit information systems, are useful steps in strengthening the framework. But more is needed. Reforms that will significantly increase the level and efficiency of financial intermediation and have a positive impact on economic growth include: A more efficient judicial sector and better enforcement of contracts; Stronger rights for secured and unsecured creditors; Stronger accounting standards and practices, to improve the quality of information available about borrowers; The development of a legal and regulatory framework that facilitates the exchange among financial institutions of both negative and positive information about borrowers. This paper - a product of the Financial Sector Strategy and Policy Department - is part of a larger effort in the department to better understand the link between financial development and economic growth, with application to Brazil. The author may be contacted at tbeck@worldbank.org.

Accounting --- Accounting Standards --- Banks and Banking Reform --- Bond Markets --- Borrowers --- Contract --- Contract Enforcement --- Credit Information --- Credit Information Systems --- Debt Markets --- Economic Theory and Research --- Emerging Markets --- Enforceability --- Enforceability Of Contracts --- Enforcement Of Contracts --- Finance and Financial Sector Development --- Financial Development --- Financial Institutions --- Financial Literacy --- Interest --- Liabilities --- Macroeconomics and Economic Growth --- Private Bond --- Private Sector Development --- Regulatory Framework --- Stock --- Stock Markets --- Unsecured Creditors

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Advanced and emerging market economies have rapidly integrated into international capital markets and this growing globalization of financial markets has led to some important changes in the patterns of saving and investment across the world. The main goal of this paper is to test whether the cross-border asset trade has led to improvements in the intermediation of these savings - that is, foster development of domestic financial markets. The authors have collected annual information on financial market development, financial openness, and other control variables for a sample of 145 countries for the period 1974-2007. Controlling for the likely endogeneity of financial openness, the analysis finds that rising financial openness expands private credit, bank assets, and stock market and private bond market development, and generates efficiency gains in the banking system. However, the impact of financial openness on domestic financial development may depend on the level of institutional quality, the extent of investor protection, and the degree of trade openness. In general, rising financial openness will enlarge the size and activity of financial intermediaries, improve efficiency in the banking system, and contribute to deepen private bond markets in countries with moderate to high levels of institutional quality and investor protection as well as in countries with high trade openness.

Access to Finance --- Bank assets --- Banking system --- Banks and Banking Reform --- Bond market --- Bond market development --- Currencies and Exchange Rates --- Debt Markets --- Domestic financial markets --- Economic Theory and Research --- Emerging market --- Emerging market economies --- Emerging Markets --- Finance and Financial Sector Development --- Financial development --- Financial market --- Financial openness --- Globalization --- International capital --- International capital markets --- Investment --- Investor --- Macroeconomics and Economic Growth --- Market development --- Private bond --- Private credit --- Private Sector Development --- Stock --- Stock market