Finance growth and inequality Bloomberg London 17 June 2015

1. FINANCE, GROWTH
AND INEQUALITY
Catherine L. Mann
OECD Chief Economist and G20 Deputy
Bloomberg, London, 17 June 2015
www.oecd.org/eco/finance-growth-inequality.htm

2. 1. Secular trends
2. Finance and growth
3. Finance and inequality
4. Policies for a healthy financial future
Structure of the presentation
2

3. SECULAR TRENDS

4. Finance has expanded considerably…
3
4
5
6
7
8
9
10
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
OECD Euro area Japan United States
Share of financial sector value added in GDP, %
OECD shows the simple average of OECD countries for which the data are available.
4

5. … with a massive increase in lending …
0
50
100
150
200
250
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
OECD Euro area United States Japan
Credit by banks and other financial intermediaries, % of GDP
OECD shows the simple average of OECD countries for which the data are available.
5

6. … and stockmarket funding
0
20
40
60
80
100
120
140
160
180
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
OECD Euro area United States Japan
Stock market capitalisation, % of GDP
OECD shows the simple average of OECD countries for which the data are available.
6

7. FINANCE AND GROWTH

8. • Reducing the need for self-financing, hence
– allocating capital more efficiently
– monitoring investments more professionally
• Facilitating international trade
• Smoothing cash-flow shocks
• Facilitating monetary policy transmission
Finance boosts growth by:
8

9. • Misallocating capital
• Magnifying the cost of implicit guarantees
• Distorting allocation of talented labor
• Generating boom-bust cycles
• Heightening the risk of regulatory capture
Too much finance can harm growth by:
9

10. In practice, finance is a key ingredient
of growth, but there are limits
-1
-0.5
0
0.5
1
1.5
2
2.5
3
30 40 50 60 70 80 90 100 110 120 130 140
Percentagepoints
Bank credit, % of GDP
-1
-0.5
0
0.5
1
1.5
2
2.5
3
10 20 30 40 50 60 70 80 90 100 110 120 130
Percentagepoints
Stock market capitalisation, % of GDP
The estimated link with growth of a 10% of GDP increase in
bank credit stockmarket funding
Dotted lines show 90% confidence intervals. Bank credit also includes credit by other intermediaries.
10

11. Increases in bank credit and stocks
have opposite growth effects
-0.5
-0.3
-0.1
0.1
0.3
0.5
Increase in bank credit
by 10% of GDP
Increase in stock market
capitalisation by 10% of GDP
Estimated link with economic growth, in percentage points, of an:
The error bars show 90% confidence intervals. Bank credit also includes credit by other intermediaries.
11

12. 1. Excessive financial deregulation
2. Too-big-to-fail guarantees
3. Bank lending outpacing bond financing
4. Household credit outpacing business credit
Channels behind the negative link
between credit and growth
12

13. Treating banks as too-big-to-fail
appears to hurt growth
Percentage point change in real GDP per capita growth when bank credit rises by 10% of GDP
The error bars show 90% confidence intervals.
13
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
Countries where bank
creditors incurred losses due
to bank failure (2008-12)
Countries where they
did not

14. Increases in bank lending have a more
negative link with growth than other debt
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
Increase in bank lending
by 10% of GDP
Increase in other debt
by 10% of GDP
Estimated link with economic growth, in percentage points, of an:
The error bars show 90% confidence intervals.
14

15. Business credit has a more favourable
link with growth than household credit
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
Increase in credit to
households by 10% of GDP
Increase in credit to
businesses by 10% of GDP
Estimated link with economic growth, in percentage points, of an:
The error bars show 90% confidence intervals.
15

16. FINANCE AND INEQUALITY

17. More finance can promote income
• equalisation if:
– It relaxes consumption constraints on poor
– It encourages work in the formal sector
• inequality if:
– It flows more freely to the better off
– Finance pays particularly dispersed wages
Finance can shape inequality both ways
17

18. Credit and stock market expansions are
linked with greater income inequality
Change in Gini coefficients for disposable income for a 10 % of GDP increase in:
The error bars show 90% confidence intervals.
-0.1
0
0.1
0.2
0.3
Credit by banks
and other
intermediaries
Stock market
capitalisation
Ginipoints
18

19. Credit is more unequally distributed
than disposable income
Credit and income shares across the income distribution in euro area countries, 2010
0
10
20
30
40
50
Bottom quintile Second quintile Third quintile Fourth quintile Top quintile
Credit share, % Income share, %
19

20. Lower-income households find access
to credit more difficult
0
10
20
30
40
50
60
70
Bottom quintile Second quintile Third quintile Fourth quintile Top quintile
Percentage of households expressing difficulty in obtaining credit in euro area countries, 2010
20

21. The share of financial-sector employees
rises with the income bracket
Percentage of financial-sector employees in each percentile of the income distribution
European countries, 2010
Percentile
0
2
4
6
8
10
12
14
16
18
20
0 10 20 30 40 50 60 70 80 90 100
21

22. Finance pays more than other sectors for
similar profiles, especially at the top
Estimated financial-sector wage premium across the income distribution,
European countries, %, 2010
0
5
10
15
20
25
30
35
40
45
Bottom
decile
Second
decile
Third
decile
Fourth
decile
Fifth
decile
Sixth
decile
Seventh
decile
Eighth
decile
Ninth
decile
Top
decile
Dotted lines show 90% confidence intervals.
22

23. POLICIES FOR A HEALTHY
FINANCIAL FUTURE

24. • Withdraw implicit too-big-to-fail subsidies
– break-ups, capital surcharges, structural
separation, resolution plans
• Implement macro-level financial supervision
– debt-service-to-income caps
• Improve compensation practices
– clawbacks
• Reduce tax biases against equity
– corporate income tax, lending to businesses (VAT)
A healthy future for finance
24

25. Financial reform is compatible with
inclusive growth
Growth Equality
Win-win
Enforce strong macro-prudential controls
+ +
Split TBTF banks or reduce TBTF support through other means
+ +
Recuperate TBTF subsidies through taxation
+ +
Income-enhancing
Reduce the debt bias in corporate taxation
+
Reduce the bias against business loans in VAT
+
Trade-off
Lower barriers to stock market financing
+ -
25

26. • Cournède, B., O. Denk and P. Hoeller (2015), “Finance and Inclusive
Growth”, OECD Economic Policy Papers, No. 14.
• Cournède, B. and O. Denk (2015), “Finance and Economic Growth in
OECD and G20 Countries”, OECD Economics Department Working
Papers, No. 1223.
• Denk, O. (2015), “Financial-Sector Pay and Income Inequality: Evidence
from Europe”, OECD Economics Department Working Papers, No. 1225.
• Denk, O. and A. Cazenave-Lacroutz (2015), “Household Finance and
Income Inequality in the Euro Area”, OECD Economics Department
Working Papers, No. 1224.
• Denk, O. and B. Cournède (2015), “Finance and Income Inequality in
OECD Countries”, OECD Economics Department Working Papers, No.
1226.
• Denk, O., S. Schich and B. Cournède (2015), “Why Do Implicit Bank Debt
Guarantees Matter? Some Empirical Evidence”, OECD Journal: Financial
Market Trends, Vol. 107.
The following reports detail the results:
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