Do Financial Systems Converge?

We apply the new panel convergence methodology developed by Phillips and Sul (2007a) on 13 financial development indices from the World Bank’s Financial Development and Structure database, to test for financial system convergence across a large set of industrial and developing countries. Our results indicate that there is no convergence for either the financial systems as a whole or their main segments. Far from decreasing, the differences in the financial systems of the sample countries seemingly persist or even increase over time.These differences are more pronounced for the stock market segment and private credit by banks, and less so for the bond market segment and bank deposits. Moreover, the convergent clubs for most indices

transcend the distinction industrial vs developing countries, as well as the distinction bank-based vs capital market-based financial systems.