balancing growth, risk, and equity - centre for economic ...cepr.org/sites/default/files/panel 1 -...

Catherine L. Mann OECD Chief Economist

22 September 2017

London

CEPR

“10 Years After the Crisis”

How to get regulation right? Balancing growth, risk, and equity

2

OECD resilience framework: Potential trade-offs between growth and risk

and, how do growth and risk interact with equity?

Tail risk = the risk of an extreme negative

growth shock

0

GDP-at-Risk =

quantile of the GDP

growth distribution

Extreme

negative

growth

i.e. max GDP loss with 95% prob.

Financial regulation typically presents a

trade-off between growth and risk

3

Note: The X axis plots the effect on fragility; Fragility is defined as higher likelihood of financial crises (polices with red outline) or a higher GDP (negative) tail risk.

Three types of financial crises are considered: Currency, banking and twin crises. Tail risk is defined as the effect on the bottom 10% of the distribution for

quarterly GDP growth. For each policy, the Y axis plots the average (overall) growth effect.

Source: Authors’ calculation based on Caldera Sánchez and Gori and by Caldera Sánchez and Röhn.

Macro-prudential

policies can reduce

fragility, but may also

lower growth

Growth benefits from

financial market

liberalisation offset

by higher crisis risk

Too much, or the wrong kind of finance: Negatively associated with growth and inequality

Increase in Gini coefficients due to higher

credit For 10% of GDP increase , Gini impact in percentage points

4

Note: The error bars show 90% confidence intervals.

Source: Cournède and Denk (2015), “Finance and Economic Growth in OECD and G20 countries”.

-0.05

0.05

0.15

0.25

0.35

-0.05

0.05

0.15

0.25

0.35

Bank credit Stockmarketcapitalisation

Growth impact of higher credit For 10% of GDP increase in credit or stock market

capitalization, in percentage points

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

All bank creditto the non-

financialprivate sector

Householdcredit

Deposit moneybank credit

Bond (andother non-

bank) credit

Stockmarketcapitalisation

Bank credit: A suspect in raising economic insecurity

Change in labour earnings growth at different percentiles of the earnings

growth distribution In percentage points

5

Source: OECD estimations using harmonised household survey data from 29 countries

-5

-4

-3

-2

-1

0

1

2

3

-5

-4

-3

-2

-1

0

1

2

3

P1 P10 P20 P30 P40 P50 P60 P70 P80 P90 P99

Bank credit Bonds and other non-bank credit

6

How is finance and regulation failing to

support strong, inclusive, resilient growth?

Implicit subsidies to TBTF institutions

Wage premium in finance

Lack of credit for dynamic firms

Bank forbearance and zombies

Too-Big-to-Fail Implicit Subsidies: More negatively associated with growth

7

Implicit bank debt guarantees influence the relationship between bank

credit and GDP growth Percentage point change in real GDP per capita growth associated with an increase in bank credit by 10% of GDP

Note: The figure shows econometric estimates of the association of an increase in bank credit with GDP growth, controlling for a wide

range of factors. The point estimates are surrounded by 90% confidence intervals.

Source: Schich, Cournède and Denk (2015), “Finance and Economic Growth in OECD and G20 countries”.

-0.4

-0.3

-0.2

-0.1

0

0.1

-0.4

-0.3

-0.2

-0.1

0

0.1

Countries where bank creditorshave been shielded from losses

Other countries

Estimated financial-sector wage premium across the income distribution, European countries, %, 2010

8

Large wage premium in finance: Adds to inequality

Note: Dotted lines show 90% confidence intervals.

Source: Denk (2015), “Financial Sector Pay and Labour Income Inequality: Evidence from Europe

Smaller growth company listings (IPOs) in advanced economies

9

Declining small growing company listings: Part of decline in business dynamism

Source: OECD Business and Finance Scoreboard 2017

0

100

200

300

400

500

600

700

800

900

0

5

10

15

20

25

30

35

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

United States Advanced Europe Japan Number of issuesUSD, billion No. issues

Zombie firms: Associated with weak banks

10

Note: Panel A shows the average level of bank health across 11 European countries (Austria, Denmark, Estonia, France, Germany, Greece, Latvia,

Portugal, Slovenia Spain and the United Kingdom), weighted by the number of firms for which a bank is considered to be their main bank. Bank health is

given by the first principal component (i.e. the one associated with the largest eigenvalue) from a principal component analysis of seven core balance

sheet and financial statement variables of banks. Panel B shows the average zombie firm share for each bin of bank health, purged of country-industry-

fixed effects. The relationship is statistically significant at the 1% level and is based on over 1.5 million firm-bank observations for 11 European countries

over the period 2001-2014.

Source: Andrews, D. and F. Petroulakis (2017), “Breaking the Shackles: Zombie Firms, Weak Banks and Depressed Restructuring in Europe”, OECD

Economics Department Working Papers, forthcoming.

Average zombie firm share for each

category of bank health

The

Bank health composite index

Less healthy

Zombies capture capital, reduce dynamism: Turnaround positively associated with productivity

11

Capital sunk in zombie firms Share of total capital stock, 2013

Note: Firms aged 10 years or more and with profits not covering interest payments over three consecutive years. The sample excludes

firms that are larger than 100 times the 99th percentile of the size distribution in terms of capital stock or number of employees.

RHS: Counterfactual gains to aggregate MFP from reducing zombie capital shares to industry best practice level.

Source: LHS: Adalet McGowan, Andrews and Millot (2017), “The Walking Dead? Zombie Firms and Productivity Performance in

OECD Countries”, OECD Economics Department working paper; and OECD calculations.

Productivity gains from reducing zombie capital Gains to aggregate multi-factor productivity

How to Get Regulation Right

12

Need to balance growth, risk and minimise trade-offs

• Post-crisis overhaul of regulation has focussed mostly on risk

• Other policies matter too

A well-developed and healthy financial system is needed

• Reduce debt subsidies

• Clean up remaining banking problems

• Europe needs to achieve overhaul of bank business model

Challenge: how to make finance more inclusive

Resources: blogs, ppt, video, research

13

The

Economic Resilience Finance and Inclusive Growth Global Forum on Productivity

Research teams: Boris Cournède, Alain de Serres, Guiseppe Nicoletti, Peter Hoeller, Oliver Denk, Aida Caldera

Sanchez, Priscilla Fialho, Filippo Gori, Dan Andrews, Chiara Criscuolo, Valentine Millot, Muge Adalet McGown,

Serdar Celik