Financial development refers to the process of  1  See P. Asdrubali; B. Sorensen; O. Yosha, “Channels of Interstate Risk Sharing: United States 1963-1990”, The Quarterly Journal of Economics, Vol. 111, No. 4, November 1996, pp. 1081-1110.
BIS Review 36/2007  1  financial innovation, and to the institutional and organisational improvements in a financial system that reduce asymmetric information, increase the completeness of markets, add possibilities for agents to engage in financial transaction through (explicit or implicit) contracts, reduce transaction costs and increase competition. Progress in financial development can obviously also occur in perfectly integrated markets.