The financial sector has come to play an increasingly significant role in European economies, rising from 2.3 per cent to 8.2 per cent of GDP between 1951 and 2007. Today, in the wake of the subprime crisis, the role of the financial sector in our societies is the subject of intense debate. A key element of this debate is whether recent developments in the sector justify its increased weight in our economies or whether, as some suggest, appropriate regulation should aim to reduce the sector’s influence. This study provides a measure of the unit cost of producing financial services over the long term in Europe, with a view to evaluating changes in the efficiency of the production of these financial services. The results show that the financial sector became ‘more costly’ from the 1970s onwards, at the very time when deregulation was intended to make it more efficient. The rise in intermediation costs during the 1970s and 1980s can, however, be explained by macroeconomic and monetary conditions. The high unit cost after 1990 coincides with the development of modern finance, which has given greater prominence to market-based activities.
Presentation
Key Results
- The economic weight of the European financial industry has been growing at a steady pace, rising 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 early 1980s, then rose rapidly until 2007
- The unit cost of producing intermediated financial services rose in Europe from 1970 onwards and remained high until 2007
- Nominal interest rates largely account for the rise in unit costs between 1970 and 1990
- The high level of unit costs after 1990 coincided with the expansion of banks’ market activities
Guillaume Bazot
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