The development of Financial Markets is always considered important for any country’s overall development. A large literature shows that the financial sector affects the rate of economic growth and the distribution of income. When the financial system goes awry and fails, it can devastate the lives of many people, as the world is currently experiencing. As proper measurement is essential for analyzing causes and designing solutions, indicators measuring the size, activity, efficiency, and stability of the financial system are important for analysts, researchers, and policymakers alike.

Finance district (Photo credit: Jo@net)

Observation shows that financial systems have continued to deepen along many dimensions, with rising values for standard indicators of financial intermediary and market development. However, progress has been uneven across income groups and regions. The deepening has been concentrated in high income countries, with much less deepening in middle- and low-income countries. This has lead to the developed countries reaping most of the fruits of development, which is also obvious since those very countries dominate the entire structure of the world financial system.

Some correlation-based evidence investigates different types of supervisory approaches used in a number of financial markets, as well as their relation to market development. Financial market development, in turn, is perceived as the level of market growth, profitability (RoE), market values (P/E) and risk (beta/volatility). certain regime features seem to correlate with financial market development. Strong legal obligations for the supervisor to develop legislation correlate significantly with higher company market values (better future prospects). Emphasizing economic aspects in the formulation of FSA objectives corresponds with higher market profitability. Furthermore, severe monetary sanctions applicable to company directors significantly (albeit negatively) correlate with market growth and the same is true for a high degree of supervisory independence.

however to increase market stability and confidence many economies resort to  introducing new supervisory structures, more advanced reporting/enforcement procedures and better accounting standards. In this respect, the analysis calls for a certain degree of cautiousness. Depending on how supervision is made more stringent, effects on market development cannot be ruled out.

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