1 “Do Financial Systems Converge ? New Evidence from Household Financial Assets in Selected OECD Countries” Giuseppe Bruno and Riccardo De Bonis Bank of Italy The views expressed are those of the authors only and do not involve the responsibility of the Bank of Italy OECD, Working Party on Financial Statistics, October 2008

2 Motivation There is a traditional great interest in comparing financial systems. Nowadays such interest has gained new emphasis due to the financial crisis ! Long term series on financial accounts provide excellent statistics to study differences and analogies among financial systems. Delegates of the WPFS may remember the joint project (Oecd, Pioneer Investment, some national central banks) to estimate national financial accounts from the Eighties.

3 Motivation (follows) Goal of this paper: to study convergence of financial systems through the lenses of household asset allocation According to the Oxford Dictionary convergence is “the tendency to become similar while adapting to the same environment”. In our framework the “same environment” might be, inter alia, globalization and financial integration. The idea is that household asset allocation, relative to disposable income, provides information on the characteristics of financial systems.

4 Motivation (follows) We collected and estimated data for nine countries: the UK, the US, Japan, Canada, Germany, France, Spain, Austria and Italy. Data are available since Household financial assets are split into four broad categories: -currency and deposits; -securities other than shares; -shares and other equity; -insurance technical reserves. We study convergence of the ratios of each product to household disposable income.

5 Motivation (follows) Important caveat There is not a theory of financial systems convergence, nor of an optimum financial system. We offer some empirical exercises, without theoretical a-priori or implications.

6 Outline 1. Convergence methods 2. Our country database 3. Results 4. Conclusions

7 1. Convergence methods: β and  convergence a) β convergence There is beta-convergence if poor economies tend to grow faster than rich countries. β < 0 means that “the lower you start the quicker you go” b)  convergence There is  -convergence when the dispersion of economic indicators falls over time across groups of economies.

8 1. Convergence methods (follows) β convergence is a necessary but not a sufficient condition for  -convergence. At this stage we measured absolute convergence. We also carried out one conditional convergence exercise.

9 2. Our country panel database Ratio (logs) of financial assets to disposable income in nine countries

10 2. Our country panel database

11 3. Results Summary of the absolute β convergence results β convergence is found for total financial assets, insurance products, shares and other equity. Financial deepening, crisis of the public pension schemes and growing role of the Stock Exchanges are the main explanations. β convergence is not clear for currency and deposits, and securities other than shares.

12 3. Results Example of a β convergence regression β− convergence for household total financial assets Dependent variable: Total financial assets average growth rate Method OLSFixed effectsRandom effects Constant Log(y t-1 ) R2R S.E. regression 0.08 N. obs. 45 Cross sections 9

13 3. Results An exercise of conditional β convergence Among the variables available for conditional β convergence we have checked the effect of the country’s commercial law structure. Countries in our panel are split in two groups: common law (US,UK and Canada) and civil law (the remaining countries). The estimation confirms the results of the absolute convergence exercise. The coefficient for the dummy indicating the country legal origin is never significantly different from zero. Commercial law did not affect the trend of currency and deposits and securities other than shares.

14 3. Results  convergence results

15 4. Conclusions β and  convergence are found for total financial assets, insurance products and shares and other equity. Mixed results, often no convergence, are obtained for securities other than shares and currency and deposits. In a nutshell, financial globalization and integration, and growth of capital markets have common trends but national peculiarities of households’ financial instruments persist. Examples are the importance of securities in Italy, deposits in Japan and decreasing role of banking deposits in the US.