Financial Development Every country has a different level of financial development. The World Bank uses four measures of banking development: depth, access, efficiency and stability. An international banking conglomerate considering expansion will want to understand a country's local banking conditions in order to have the most informed view, to help with making the expansion decision. In this scenario, the countries being evaluated are the United States, Saudi Arabia, Brazil, India, South Africa, Iran, China and Turkey. This report will analyze the banking systems of each of these countries against the World Bank criteria.

Basic Economic Conditions

Before investigating the banking systems in each country, a brief overview will be provided of the prevailing economic conditions in each nation. The size of the economy, measured by GDP and by GDP per capita, is related to the market potential for a bank to enter the country. The more money there is a country, the better it will be for a bank to enter. The following figures were calculated from the CIA World Factbook.

Country

GDP Size (PPP) (billions)

GDP Rank

GDP Growth

GDP per capita

United States

$16,720

1

1.6%

$52,800

Saudi Arabia

$927

19

3.6%

$31,300

Brazil

$2,416

7

2.3%

$12,100

India

$4,990

3

3.2%

$4,000

South Africa

$595

25

2%

$11,500

Iran

$987

18

-1.5%

$12,800

China

$13,390

2

7.7%

$9,800

Turkey

$1,667

16

3.8%

$15,300

UK

$2,387

8

1.8%

$37,300

This figures show that all of the economies selected for study are fairly large. The following should be taken into consideration with respect to these statistics. First, Saudi Arabia's economy has cooled off considerable in the past few years. Second, Turkey's economic growth is highly volatile. It is further worth noting that the economic performance of both Saudi Arabia and Iran is almost entirely related to the price of oil. As oil goes, so too do those economies. There are substantial differences in GINI index in these different countries as well. Most Saudis earn must less than the GDP per capita figure, as wealth is highly-concentrated in that country. In South Africa, there are stark class divisions as well, with the relatively small population of white South Africans living roughly a Western standard of life, but most black South Africans living in poverty. Such great wealth disparities reflect on the size of retail banking markets in particular.

Banking Industry Structure

Before investigating the banking indicators, there is one critical factor that must be considered, which is the openness of the banking system. The United States has an open banking system with fairly little regulation compared with most countries. The retail banking system is somewhat diffuse, but is becoming more concentrated. Thus, it is open for expansion but not as concentrated as the UK market. There are three closed banking systems on this list, in China, Saudi Arabia and Iran, where foreign banks are allowed minimal presence if any, and the banking system is almost entirely populated by state-owned enterprises. Of these countries, South Africa has the banking system most similar to that of the UK in terms of structure and openness.

Banking System Measures

The World Bank provides data on the banking systems of countries around the world. The following chart reflects data from the banking systems of the different countries that have been chosen for analysis, with figures from 2011. There is no real benefit to looking at data past that unless it shows something distinctive about the trend. The current situation and future situation are what matter. Loading up the analysis with superfluous data will undermine the principle of clarity in writing.

GFDD.A1.02*

GFDD.DI.02**

GFDD.E1.04***

GFDD.S1.01****

United States

35.43 (-)

61.63 (?)

27.02 (?)

Saudi Arabia

47.51 (?)

14.68 (?)

Brazil

46.15 (?)

91.93 (?)

3.38 (volatile)

19.61 (?)

India

10.64 (?)

65.15 (?)

40.19 (?)

South Africa

10.71 (?)

98.59 (-)

Iran

29.53 (?)

23.22 (?)

n/a

n/a

China

n/a

19.59 (?)

Turkey

18.33 (?)

64.59 (?)

UK

24.87 (?)

* Branches per 100,000 adults, an access measure

** Deposit money banks' assets to GDP %, a depth measure

*** Bank overhead costs to total assets %

**** Bank's z-score

Note that the z-score is a measure of financial institution risk (Lepetit, 2013) roughly evaluating the likelihood of default of the country's banking system.

United States

In the past, regulations meant that retail banks were restricted to the state level, and that there was separation between retail and investment banking. Successive waves of deregulation in recent decades have removed this restrictions, so there is increasing concentration in the U.S. banking industry (Chossudovsky, 2008). Nevertheless, it remains of the most diffuse banking industries in the world.
The U.S. has generally favourable metrics. The country has the second-highest rate of access to banking among nations studied. The U.S. banking access level appears to have reached a saturation point as the trend in access is unchanged in recent years. The deposits are declining in relation to GDP. This measure has to be understood in context, whereby the as the U.S. economy grows (which it is) the U.S. consumer tends to swap savings for spending. Right now, savings rates are declining in the U.S. As the economy improves, explaining the change in this ratio (FRED, 2014). The U.S. banks have moderate performance in terms of efficiency, and they are trending in the wrong direction. This could highlight overcapacity in the industry, when looked at in context of the very high access numbers. The z-score is highest among all nations, indicating that the U.S. has the least stable banking system among these countries. This might seem counterintuitive, but this is an industry that might have capacity industry, where just recently there were hundreds of bankruptcies of banks including high profile ones, and where the government needed to bail out the entire banking system to prevent its collapse. The high level of deregulation has led to excessive risk-taking within the U.S. banking system, and thus its very high z-score. The U.S. Federal Reserve provides data on that nation's banking balance sheet, illustrating that systemwide there is sufficient liquidity, but not an exceptional level by any means (U.S. Federal Reserve, 2014). Overall, the U.S. is going to be a tough market to enter, because of saturation, inefficiency and higher risk of default than in any of the other banking systems. Only the size of the economy and minimal barriers to entry make the U.S. An attractive market.

Saudi Arabia

Saudi has a closed banking system, wherein the banks -- along with most of the major corporations in the country -- are owned by government. There are 13 domestic banks. Saudi banks are also Islamic banks, meaning that entering the Saudi market will require the ability run a bank on Sharia law principles (KSA, 2013). The country has relatively low access, though access is increasing. In addition, Saudi has the lowest score for bank assets/GDP. On the plus side, the Saudi banking system is relatively efficient, and has a decent z-score. The backing of the government, underwritten by oil, helps ensure the stability of the Saudi banking system. The access score highlights potential opportunity, where the country may be underserved, but deposits are low. While deposits and access should be correlated, the causal relationship is not known. It is possible that access is low because bank deposits are low, or vice versa.

Saudi Arabia has relatively low access to its capital markets. Those markets had decent depth in 2007, but since that point, stock market depth in Saudi has collapsed to what is now a very low level. Market efficiency has declined in that same time period, as the infrastructure has remained the same but the amount of money cycling through the market has declined. Not surprisingly, Saudi Arabia's capital markets have seen a decline in stability over this same time period.

Brazil

Brazil has the highest penetration of bank branches, highlighting strong growth. But for Brazilians, access is high, and growing, indicating that the banking system is still being built out, but with access well above most other countries there is also the threat that the industry is over capacity. The high level of deposits relative to GDP, however, indicates that growth in the Brazilian banking system is probably being driven by rising demand. Overhead costs have been volatile in recent years, and are much higher than in other countries. This is to be expected in an economy where the banking system is growing -- new branches cost money, and high overhead costs are an indicator of an inefficient system that may be set to contract. That said, the z-score is reasonable, meaning that there is good stability in the Brazilian banking system.

Access to capital markets in Brazil is only average, and has not changed much. The same can be said for depth measures. Because of the low level of access, market efficiency is relatively low. However, the Brazilian capital markets are relatively stable. Brazil has high wealth inequality, a condition which can contribute to stable but small, inefficient markets to which few have access.

India

The Indian banking system has fairly low bank branch penetration, but this is growing. Deposit levels are moderate but growing. The efficiency of the Indian banking system is improving, perhaps because of the low buildout of branches. On these three metrics, India has a stable banking system. At issue is the high risk of default, as India has a very high z-score. This means that while the Indian market has promise, it also carries with it significant risk.

India has reasonably high access in its capital markets, but market depth has deteriorated in…