Measuring and Explaining the Evolution of Financial Efficiency

IPP Report n°8 – March 2015

Author: Guillaume Bazot

Summary:

Finance has 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 report proposes a measure of the unit cost of the production of financial services over the long term in some European countries, as a way of assessing the efficiency gains in financial services production.
The results show that finance in Europe 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 in some countries coincided with the development of modern finance that gives a greater role to market activity.

This report, and the publications below, have been conducted within the project “What evolution for the unit cost of financial intermediation in Europe?” entirely funded by Finance Watch an NGO located in Brussels.

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Related publications

June 2014 – IPP Policy Brief n°10: “Has finance become to expensive? An estimation of the unit cost of financial intermediation in Europe, 1951-2007“
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)

Press articles

The Economist, 21st June 2014: “Counting the cost of finance”

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