Financial Sector Assessment a handbook, Chapter 4 Assessing Financial Structure and Financial Development, imf and World Bank, August 2005

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in crowding out by heavy domestic government borrowing. More generally, government 
debt management can have a decisive influence on the functioning of the bond market.
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Effective public debt management can help provide the benchmarks needed to price more 
risky securities, and the physical and institutional infrastructures for government debt 
markets could reinforce and complement the needed infrastructure for bond markets gen-
erally. The transactions technology infrastructure—in this case, also potentially includ-
ing such features as privileged market makers—may also be inadequate. These and other 
prerequisites for bond market development are clearly described in World Bank (2001c), 
which also notes how sensitive bond market development is to monetary policy manage-
ment and generally macroeconomic stability—prerequisites that lie beyond the scope of 
development assessment. 
Liquid securities markets require a minimum scale to be cost-effective. Certainly, the 
cost built into the design of the trading platform and the regulatory burden can become 
decisive. Overheads of the market itself and of the regulator can also be too heavy to be 
borne by fees on the existing level of transactions. Where possible, the assessor should 
attempt to calculate those costs and the degree to which they are being subsidized. This 
calculation is especially important where consideration is being given to further com-
puterization, a step that often may not be cost-effective or necessary in small exchanges. 
With many small securities markets, the inherent viability of the brokerage industry needs 
to be checked, which has been a problem in several countries. In some cases, most brokers 
are subsidiaries or divisions of banks, an arrangement that may help reduce overheads but 
may limit the energy with which the brokers develop their services. Of course, the impor-
tant goal is not survival of the stockbrokers per se, but achievement of an optimal way of 
giving local firms and investors access to liquid securities markets. 
Many securities markets have been subsidized through tax concessions to listing com-
panies, but with limited success. Several countries have forgone substantial revenue in 
this way with the objective of encouraging the development of the stock exchange but 
without generating any sizable activity in the market. 
The degree to which larger firms are going outside the country to issue shares or 
depository receipts in advanced stock exchanges should be examined. While such behav-
ior can reduce local market liquidity, it also has the potential to result in the importation 
of improved transparency and other practices by a demonstration effect. It also results in 
lower funding costs for the companies that do have such access.
More generally, the question for small countries of whether outsourcing and closer 
integration with regional or global markets would be more effective than promotion of an 
onshore securities market must be seriously considered (compare to Bossone, Honohan, 
and Long 2002).