Question

On the financial system of the country using the intermediation approach what are the following ratios measures.

1) Private credit by deposit money banks to GDP (%).
2) Private credit by deposit money banks and other financial institutions to GDP (%).
3) Deposit money banks’ assets to GDP (%).
4) Deposit money bank assets to deposit money bank assets and central bank assets (%).
5) Liquid liabilities to GDP (%).
6) Financial system deposits to GDP (%).
7) Life insurance premium volume to GDP (%).
8) Nonlife insurance premium volume to GDP (%).
9) Domestic credit to the private sector to GDP (%).
Good

Answer 1

1) Private credit by deposit money banks to GDP (%).

Answer: Deposit money banks are the institutions that have deposits from public and needs to repay them when demanded. The credit extended by such deposited money to private sector measures the size of the finance sector of that country. As it is measured with respect to GDP of the country, So the higher the ratio the bigger is the size of the finance sector of that country. However it varies based on the depth of the involvement in the finance sector by the goverment.

2) Private credit by deposit money banks and other financial institutions to GDP (%).

Answer: Similar to the above ratio, but this also includes lending by other financial institutions as well such as non banking finance companies which are not termed as banks since they are not allowed to raised deposits from common public but they are essential for lending to private sector as well.

3) Deposit money banks’ assets to GDP (%).

Answer: Deposit money banks are the institutions that have deposits from public and needs to repay them when demanded. It measures the assets of the deposit money banks with respect to the GDP of that country. However they do not only include the public deposit money but also the Government bonds held by such institutions.

4) Deposit money bank assets to deposit money bank assets and central bank assets (%).

Answer: Ratio of public money as well as government's deposit( which is the money actually pumped ito the economy) to the reserves by central bank. The higer the ratio the more is the liquidity in the economy.

5) Liquid liabilities to GDP (%).

Answer: It shows how much deposits is in the form of liquid assets such as savings bank accounts, liquid funds etc to the GDP of that country. It should be lower as this the amount can be demanded at any time and can not be used for lending purpose for a long duration projects. liquid liabilities fund can only be used to fund credits of short duration such as credit cards.

6) Financial system deposits to GDP (%).

Answer: Includes the deposits by the whole financial system. The higer ratio is a sign of large source of funding for the economy of that country.

7) Life insurance premium volume to GDP (%).

Answer: Shows participation of Life insurance sector to GDP of that country. Higher ratio shows higher security of the citizen of that country.

8) Nonlife insurance premium volume to GDP (%).

Answer: Shows participation of non life insurance sector to GDP of that country. Higher ratio shows security of that country's assets as well people (from threats other than life).

9) Domestic credit to the private sector to GDP (%).

Answer: It shows how much is the private sector is dependent on credit by the domestic deposits. Higher ratio shows that the economy is less dependent to foreign funding for the growth of the private sector in that economy.