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Has finance become too expensive? An estimation of the unit cost of financial intermediation in Europe, 1951-2007

Download the IPP Policy Brief n°10

“Has finance become too expensive?

An estimation of the unit cost of financial intermediation in Europe, 1951-2007”

Author: Guillaume Bazot

Contact: guillaume.bazot@ipp.eu, antoine.bozio@ipp.eu

Synthesis

note10-ipp-financewatchFinance played an increasing important role in European economies, growing from 2.3 per cent of GDP in 1951 to 8.2 per cent in 2007. But since the subprime mortgage crisis, the role and size of finance in our societies has been hotly debated. A key question in the debate is whether recent financial developments justify the accrued importance of finance in our economies and whether, as some propose, regulation should be aimed at reducing its importance. This study, financed by Finance Watch and led by Guillaume Bazot of the IPP, proposes a measure of the unit cost of the production of financial services over the long term in Europe, as a way of assessing the efficiency gains in financial services production. The results show that finance has become more “expensive” since the 1970s, just when deregulation was intended to make it more productive. The growth in intermediation costs between 1970 and 1990 can nevertheless be explained by macroeconomic and monetary conditions. By contrast, the increase in unit cost after 1990 coincides with the development of modern finance that gives a greater role to market activity.

Key points

  • The economic clout of the European finance industry increased steadily from 2.3 per cent to 8.2 per cent of GDP between 1951 and 2007
  • The volume of financial services produced remained relatively stable until the beginning of the 1980s, then grew explosively until 2007
  • The unit cost of financial intermediation services began to grow in Europe from 1970 and remained high until 2007
  • The nominal interest rate explains to a great extent the increase in unit cost between 1970 and 1990
  • The high values of unit cost after 1990 coincide with the growth of the market activities of banks

Resources

Working Paper (PSE 2014-17): “Financial Consumption and the Cost of Finance: Measuring Financial Efficiency in Europe (1950-2007)”

Data used in the article and the Policy Brief n°10: base in Excel format and appendix in pdf

Download the press release (in French)

See the page dedicated to the project: “What evolution for the unit cost of financial intermediation in Europe?”

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