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

Author

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  • Guillaume Bazot

    (PSE - Paris School of Economics)

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://halshs.archives-ouvertes.fr/halshs-00986912
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    1. Economics vs bankers
      by chris in Stumbling and Mumbling on 2016-05-10 17:42:52

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    Cited by:

    1. Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-1438, April.
    2. -, 2018. "Regional digital market: Strategic aspects," Documentos de Proyectos 43633, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    3. Boris Cournède & Oliver Denk & Peter Hoeller, 2015. "Finance and Inclusive Growth," OECD Economic Policy Papers 14, OECD Publishing.
    4. Thomas Philippon, 2014. "Efficiency and Benefit-Cost Analysis of the Financial System," The Journal of Legal Studies, University of Chicago Press, vol. 43(S2), pages 107-120.
    5. repec:pal:compes:v:60:y:2018:i:1:d:10.1057_s41294-017-0045-1 is not listed on IDEAS
    6. Meyer Aaron & Francisco Rivadeneyra & Samantha Sohal, 2017. "Fintech: Is This Time Different? A Framework for Assessing Risks and Opportunities for Central Banks," Discussion Papers 17-10, Bank of Canada.
    7. Philippon, Thomas, 2016. "The FinTech Opportunity," CEPR Discussion Papers 11409, C.E.P.R. Discussion Papers.
    8. Olivier Godechot, 2015. "Financialization Is Marketization! : A Study on the Respective Impact of Various Dimensions of Financialization on the Increase in Global Inequality," Sciences Po publications 15/3, Sciences Po.
    9. Boustanifar, Hamid & Grant, Everett & Reshef, Ariell, 2016. "Wages and human capital in finance: international evidence, 1970-2005," Globalization and Monetary Policy Institute Working Paper 266, Federal Reserve Bank of Dallas.

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    Keywords

    Financial Consumption; Financial Efficiency; Europe;

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