karolina ekholm, deputy governor of the riksbank: "a financial market that fosters sustainable...

Karolina Ekholm, Deputy Governor

12 September, 2013

How to incentivize

the financial

system to support

investments in the

real economy…

Karolina Ekholm, Deputy Governor

12 September, 2013

…or…

How to create a

stable financial

system that

fosters economic

growth?

Does financial development promote

growth?GDP per capita and financial development

Source: Phillippon and Reshef, “An international look at the growth of Modern

Finance”, 2013

Maybe only up to a point…Private credit to GDP and growth

Source: Cecchetti and Kharroubi, ”Reassessing the impact of finance on growth”, 2012

Regulatory reform leads to changes in the

financial sector

Regulatory

reform

Enhance

d

financial

stability

More and

better capital

Stronger

liquidity

framework

More

transparency

Systemic risk

perspective

A more

sustain-

able

financial

system

Stronger

real

economy

Decline in investments to GDP in

advanced economies…Gross capital formation, per cent of GDP

Source: IMF World Economic Outlook April 2013

15

17

19

21

23

25

27

29

31

33

15

17

19

21

23

25

27

29

31

33

92 94 96 98 00 02 04 06 08 10 12

Major advanced economies Euro area

Other advanced economies Emerging markets

…accompanied by decline in

corporate credit to GDPCredit to non-financial corporations, per cent of GDP

60

70

80

90

100

110

120

130

00 01 02 03 04 05 06 07 08 09 10 11 12

Euro area UK US Japan

Source: BIS Banking Statistics

Decline in bank lending to

corporations in the euro areaCorporate lending in the euro area, annual percentage change

Source: ECB SDW

Note. Core represents Germany, Netherlands and France

Stricter supply and less demand for

corporate loans in the euro areaWeighted net percentages, dotted lines: forward looking

Source: ECB Lending Survey

Does higher capital requirements

have a negative effect on growth?

Yes, is the typical response from banks.

No, according to Admati and Hellwig (2013).

The only problem is that shareholders are reluctant to issue new

equity because it would benefit creditors at the expense of

shareholders.

Maybe, according to Aghion (2013).

They may inhibit lending to firms in sectors with lower asset

tangibility, which are typically the most innovative ones.

Conclusions

A larger financial sector is not necessarily better from a

long-run growth perspective.

The current low levels of investment and corporate

lending in advanced economies are probably mainly due

to expectations of a weak development of demand.

They should not be used as arguments for watering

down proposals of financial sector reform.

Such reform is needed to making the aggregate

economy resilient to large adverse shocks.

Extra

Decline in private sector debtPrivate non-financial sector debt, per cent of GDP

Source: BIS 83rd Annual Report, 2012-2013

Low growth of loans to private non-

financial sectorAnnual percentage change

Source: BIS

Global imbalances hold back global

demandCurrent accounts, per cent of world GDP

Source: IMF World Economic Outlook April 2013

-3

-2

-1

0

1

2

3

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

US Germany and Japan

Euro area ex Germany Developing Asia

Middle East and North Africa Other advanced economies

Other economies Discrepancy

Different views about the balance

between debt vs equity

13

2 1 32

Source: Anat Admati, What’s wrong with banking and what to do about it, 2013

Financial crises have large negative

impacts on GDP per capitaJapanUS UK

Korea Mexico Sweden

Source: BIS

MFI lending to households and

corporations in SwedenPer cent, July 2013

Sources: SCB and the Riksbank