Debt and net financial wealth a comparative analysis

Debt and net financial wealth: a comparative analysis for some European countries Giuseppe Cinquegrana Researcher National Accounts directorate Istat OECD Working Party - Paris, 30 November 2010 1

Model of Financial System Bank oriented vs. Market oriented Analysis on Financial Accounts for some European countries 2

Model of Financial System • Bank oriented Gershenkron, 1962 Universal banks have carried out a crucial role in the economic development process in the nineteenth century (see Italy and Germany) 3

Model of Financial System • Bank oriented Diamond, 1984, Mayer, 1988, Levine, 1997, 2003, Financial intermediaries have a fundamental role in overcoming market failures due to the asymmetric information. By monitoring and screening the firms’ projects during many years, banks are able to assess and prevent opportunistic behaviours related to adverse selection and to moral hazard problems. 4

Model of Financial System • Market oriented new view Gurley and Shaw (1955) Starting from the portfolio risk diversification theory, they identify the crucial role of finance in the risk selection and asset allocation on behalf of the investors. Also the degree of development and of the innovation technology of the economy determines the model of financial system. 5

Model of Financial System • Law finance approach The relationship between finance and growth has to be analyzed taking into account the different legal traditions • Common Law Civil Law 6

Model of Financial System Common law • historically oriented to a greater protection of the holders of property rights towards the government • public companies and widespread shareholding • governance conflicts: shareholder / manager • very liquid financial markets are, in effects, the main protection for shareholders Market Oriented Financial System 7

Model of Financial System Civil Law • • lower degree of protection of the private sector • governance conflicts: majority shareholder / minority shareholder • firm ownership more concentrated a bigger cost for the firms to obtain funding directly on the financial market, because of the high risk premium on the invested capital demanded by minority shareholder Bank Oriented Financial System 8

Goldsmith’s ratios • FIR: Financial Interrelation Ratio measure of the degree of financial intensity of an economic system the financial assets of the whole economy the wealth of the whole economy 9

Goldsmith’s ratios • FIN: Financial Intermediation Ratio measure of the degree of financial intermediation of an economic system the liabilities of the Financial Corporations the sum of the liabilities of all the other sectors 10

Other Financial indicators • CIR: Credit Intermediation Ratio (Capelle-Blancard et al. , 2006 ) measure of the degree of banking intermediation on the whole financial intermediation in an economic system the loans granted by the Financial Corporations the sum of the liabilities issued by all the other sectors 11

Other Financial indicators • NFIR: Net Financial Interrelation Ratio the net financial wealth Gross Domestic Product at current prices 12

Analysis and data • Financial Accounts (ESA 95) European Monetary Union United Kingdom • Source: EUROSTAT, OECD, OFFICE FOR NATIONAL STATISTICS UK 13

Institutional Sector ESA 95 • Total Economy S 1 • Non Financial Sector S 11 • Financial Sector S 12 • General Government S 13 • Household S 14 • Rest of the World S 2 14

Financial Interrelation Ratio (%), FIR, by European country 15

Financial Intermediation Ratio (%), FIN, by European country 16

Credit Intermediation Ratio (%), CIR, by European country 17

Net Financial Interrelation Ratio (%), NFIR, Private Non Financial Sector (S 11+S 14) by European country 18

Net Financial Interrelation Ratio (%), NFIR, Household Sector (S 14) by European country 19

Financial liabilities on GDP (%) of the whole Non Financial Sector (S 11+S 13+S 14) by European country 20

Financial liabilities on GDP (%) of the Private Non Financial Sector (S 11+S 14) by European country 21

Financial liabilities on financial assets (%) Household Sector (S 14) by European country 22

Thanks OECD Working Party - Paris, 30 November 2010 23