Emerging market and developing economies (EMDEs) comprise a large and diverse group whose financial systems have grown in importance over the last decade. Based on the classification of countries used by the IMF in its World Economic Outlook (WEO), 150 economies are classified as EMDEs, including 10 members of the G20.They differ substantially in terms of economic size, level of development, legal and institutional frameworks, and other factors that affect financial systems. Over the last 10 years, financial systems in EMDEs have grown significantly vis-à-vis those in advanced economies (AEs). Although they proved resilient during the global financial crisis, they are now facing important new challenges.
Some key characteristics of financial systems in EMDEs are particularly relevant for financial stability. Since EMDEs are a large and diverse group, they do not all share the same financial system characteristics; in fact, many characteristics vary as much across EMDEs as between EMDEs and AEs. However, in general, financial systems in EMDEs tend to be relatively smaller in size, more concentrated and less complex than systems in AEs, with banks playing a large role while capital markets and other financial institutions remain relatively under-developed. Other prevalent (although not universal) features include greater dependence on foreign capital, weaker institutional frameworks and market infrastructures, important capacity constraints, a relatively greater involvement of the state in the financial system, and greater use of international currencies for domestic financial transactions (“financial dollarization”). Continue reading