The determinants of financial development: Evidence from Bayesian model averaging

We examine the determinants of financial development using our global sample and employing different measures of financial development that assess the degree of depth and efficiency of financial intermediaries. We use instrumental variable Bayesian model averaging to test competing theories with this unifying framework. After examining nearly 20 potential determinants of financial development, we find that the rule of law, as well as some of its components, is the most important. In addition, our results suggest that wealth inequality is irrelevant to banking sector development but positively associated with stock market development. •Financial development is driven by the rule of law.•Wealth inequality is positively associated with stock market development.•Bayesian model averaging on a global sample is used.