ECB Bini Smaghi: Has the financial sector grown too big?
15 April 2010
Speaking at a Nomura Seminar in Kyoto, Bini Smaghi said that ECB research has shown that while a deep financial sector leads to more optimal economic diversification, its contribution to diversification is substantially weakened when it becomes too large so it is essential to define the optimal size
His remarks covered the following points:
· First, that efficient financial markets enhance growth. However, if they grow “too large,” then they may lead to a misallocation of resources and cause costly crises. Recent research at the ECB has shown that while a deep financial sector leads to more optimal economic diversification, when it becomes “too large”, its contribution to diversification is substantially weakened. Continuing work in this direction is critical, not as an abstract intellectual exercise, but because of the very tangible negative consequences of a “too large” financial sector, as recent experience has highlighted.
· Second, he presented evidence showing that in the build-up to the crisis, the size of the financial sector outgrew its trend.
· Third, identifying some of the main reasons why the financial sector became too large and discuss how to avoid that such imbalances materialize again are essential. To this end, regulation and supervision can play an important role.
· Fourth, while ensuring that the financial sector does not grow beyond its optimal size, the new regulatory framework should not reach the point of financial repression.
He concluded by saying that: “Given the obvious negative impact of an excessively large financial industry, we keep asking ourselves whether limits should be imposed on the size of the financial sector itself. I hope it is clear from the evidence I have presented that the answer to this question is yes. However, it is also essential to make sure that we do not repress financial markets to the point of jeopardising their contribution to growth.”
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