Search

Gorton and Winton (1998) link the size of the banking system in transition economies to financial stability. We provide empirical evidence consistent with their notion that the size of the financial system will be smaller in these countries. This effect holds even after controlling for the effect of rule of law and/or legal origin, and other relevant variables. Transition economy status, thus adds additional explanatory power to traditional law and finance explanations of financial development. Classification of transition economies by legal origin reveals that Russian legal origin has a strong negative effect on financial development. Regression analysis shows claims on the private sector/gross domestic product (GDP) to be 46 to 60 percentage points lower in the countries of the former Soviet Union, and 23 to 39 percentage points lower in non-Soviet transition economies compared to countries of English legal origin. There is a positive relation between claims on the private sector and the rule of law for a broad cross section of countries. JEL codes: G21, G28, K40, O16 Keywords: financial intermediation, legal systems, transition economies, rule of law., GORTON AND WINTON (1998) provide a theoretical study linking the size of the banking system in transition economies to financial stability. Banks in these countries have a large volume of [...]