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Sem 5 Prep
← Money & BankingHow a financial system is put together

Formulas for this chapter

Financial deepening ratio

Deepening = Credit to the private sector / GDP x 100

When the question asks how deep or developed a system is. It is a stock over a flow, so only comparisons mean anything: this year against last, or one country against another.

Credit
Outstanding credit to the commercial or private sector
GDP
One year's output, at current prices

Market-based share of external financing

Market share = (Bonds + Equity raised) / (Bank credit + Bonds + Equity) x 100 Bank share = Bank credit / total x 100

When asked whether a system is market-based or bank-based. Bonds count on the market side, which is where most marks are dropped.

Bonds
Funds raised through debt securities in the market
Equity raised
Fresh equity raised in the primary market
Bank credit
Loans and advances from banks
Step 3 of 27
The real wordsTheory

Deepening and broadening

The professor says these two as a pair, so learn them as a pair.

Financial deepeningThe development and sophistication of financial markets and institutions, leading to a more extensive and efficient allocation of capital. It promotes growth by facilitating investment, improving resource allocation and raising the efficiency of financial intermediation.
Financial broadeningExtending the reach of financial services to a larger segment of the population, including previously underserved groups. It emphasises access to basic financial services, and can reduce poverty and improve income distribution.
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