Why do we need a financial sector?

Financial sector activity has accelerated along with its pay scales. This debate seeks to identify which activities are socially useful. It also considers regulations that could curb excesses in the sector whilst not hindering those activities for which it enhances capacity.

Commentaries

  • Why do we need a financial sector?

    Wouter den Haan, 24 October 2011

    According to national-income account data, financial institutions are responsible for an important fraction of what countries produce each year. A standard way to measure a sector’s contribution to GDP is to calculate its value added, that is, the difference between the value of the products produced minus the value of the products used in production. This “value added” is...

  • Investment banking

    Charles A.E. Goodhart, 28 October 2011

    Investment banking has attracted much vilification in recent years, being frequently described as “socially useless”, or a “casino”. Yet if its functions are not properly appreciated, the ‘reforms’ that are now being proposed could lead to further problems down the road ahead (see also the latest Vox eBook The Future of Banking, Beck 2011).   ...

  • On the tradeoff between growth and stability

    Alexander Popov, Frank Smets, 2 November 2011

    In the two decades leading to the Great Recession, academics had mostly converged on Schumpeter’s view that well-developed financial systems play a crucial role in stimulating economic growth. A host of academic papers had concluded that deeper domestic financial markets improve economic efficiency, lead to a better allocation of productive capital, and increase long-term economic growth (...

  • The myth of financial innovation and the Great Moderation

    Wouter den Haan, Vincent Sterk, 7 November 2011

    Many changes have taken place in the financial sector over the last couple of decades. Deregulation was followed by a burst of innovation, a step-up in leverage, an increase in cross-border capital flows, and larger financial institutions. The recent financial crisis is believed to have been caused by some of these changes in the financial sector, and lawmakers are under pressure to come up with...

  • What is the contribution of the financial sector?

    Andrew G Haldane, Vasileios Madouros, 21 November 2011

    There is no doubting the financial sector has a significant impact on the real economy. Financial crisis experience makes this only too clear.1 Financial recessions are both deeper and longer-lasting than normal recessions. At this stage of a normal recession, output would be about 5% above its pre-crisis level. Today, in the UK, it remains about 3.5% below. So this much is clear: Starved...

  • Where is Wal-Mart when we need it?

    Thomas Philippon, 1 December 2011

    The role of the finance industry is to produce, trade, and settle financial contracts that can be used to pool funds, share risks, transfer resources, produce information, and provide incentives. Financial intermediaries are compensated for providing these services. Measuring financial intermediation The sum of all profits and wages paid to financial intermediaries represents the cost of...

  • What is the value added of banks?

    Christina Wang, 7 December 2011

    Like an organ of the human body, the financial system calls most attention to itself when it malfunctions. But in normal times, is the financial system like the human heart, circulating essential capital throughout the economy? Or is it like the appendix, doing little when healthy but devastating when ill? Since the truth is probably somewhere in between, how can we calculate the contribution of...

  • More Bankers, More Growth?

    Gunther Capelle-Blancard University Paris 1 Panthéon-Sorbonne & Cepii, 10 November 2011

    In line with Thorsten Beck’s post, I would like to emphasize the issue related to the measurement of financial deepening. The crisis has seriously altered the mindset on the supposed positive impact of finance on growth. The crisis also called into question the commonly accepted measures to assess the growth of the financial sector. In the finance-growth literature, the size of the...

  • Specific questions in need of an answer

    Wouter DenHaan London School of Economics, 5 November 2011

    To stimulate the debate a bit and possibly provide some guidance I have come up with the following set of questions. Is providing financing for small firms (through bank loans or private equity) the most important role of the financial sector? Is the financial sector just needed to smooth life-time consumption? How important are the provision of complex securities to make the world safer? Would...

  • Two concepts of financial development (and two different measures)

    31 October 2011

      This is an important and relevant topic as many observers have started to doubt the contribution of finance to growth after the current crisis. And there are two inter-related questions in this respect – what concept of the financial sector and how to measure these concepts?   On the one hand, there is the academic literature on focusing on the relationship between financial...

  • Additional readings

    ugo panizza unctad, 26 October 2011

    Readers may be interested in a VOXEU post in which we discuss the optimal size of the financial sector. We conclude that: ....the marginal effect of financial development on output growth becomes negative when credit to the private sector surpasses 110% of GDP. This result is surprisingly consistent across different types of estimators (simple regressions and semi-parametric estimations...

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