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Financial Consumption and the Cost of Finance: Measuring Financial Efficiency in Europe (1950-2007)

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  • Guillaume Bazot

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

This paper proposes to assess financial intermediation efficiency in Germany, France, the UK, and Europe more broadly, over the past 60 years. I rely on Philippon's (2012) methodology, which calculates the unit cost of financial intermediation through the ratio of 'financial consumption' | measured by financial income | to 'financial output' | approximated by the sum of outstanding assets intermediated. The contribution of this paper is threefold. First, because financial industry VA ignores banks' capital income (capital gains, dividends and interest on securities) it is an imperfect measure of the consumption of financial intermediation. So long as capital income generates wages and profits to financial intermediaries, it is akin to an implicit consumption of financial services. Using banking income instead of banking VA to measure the consumption of banking services, I show that the GDP share of finance has increased continuously in Germany, France, the UK and Europe as a whole. Second, the unit cost of financial intermediation increased over the past 40 years, except in France where, overall, it stagnated. In addition, the European unit cost matches the US unit cost calculated by Philippon (2012). Finally, because financial intermediaries deal with nominal stocks and ows, and because the unit cost increases during periods of monetary troubles, I focus here on nominal rates of interest to explain the evolution of unit cost. I show that a rise in nominal rates of interest increases the spread of bank interest, so that 1970s and 1980s high unit costs are statistically explained by increases in short-term interest rates. On the other hand, post-1990s high unit cost seems to coincide with the development of new market-based activities.

Suggested Citation

  • Guillaume Bazot, 2014. "Financial Consumption and the Cost of Finance: Measuring Financial Efficiency in Europe (1950-2007)," Working Papers halshs-00986912, HAL.
  • Handle: RePEc:hal:wpaper:halshs-00986912
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00986912
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    Keywords

    Financial Consumption; Financial Efficiency; Europe;
    All these keywords.

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