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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 • firm ownership more concentrated • governance conflicts: majority shareholder / minority shareholder • 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 (ESA95) European Monetary Union United Kingdom • Source: EUROSTAT, OECD, OFFICE FOR NATIONAL STATISTICS UK 13 Institutional Sector ESA95 • Total Economy S1 • Non Financial Sector S11 • Financial Sector S12 • General Government S13 • Household S14 • Rest of the World S2 14 Financial Interrelation Ratio (%), FIR, by European country FIR ratio (financial assets S1 / GDP) (Median EMU basis 100) 200 180 160 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 Italy France United Kingdom Spain Germany 2008 20002008 15 Financial Intermediation Ratio (%), FIN, by European country FIN ratio (liabilities S12 / liabilities S11+S13+S14+S2) (Median EMU basis 100) 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005 2006 2007 Italy France United Kingdom Spain Germany 2008 20002008 16 Credit Intermediation Ratio (%), CIR, by European country CIR ratio (loans S12 / liabilities S11+S13+S14+S2) (Median EMU basis 100) 160 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 Italy France United Kingdom Spain Germany 2008 20002008 17 Net Financial Interrelation Ratio (%), NFIR, Private Non Financial Sector (S11+S14) by European country NFIR for the Private Non Financial Sector (net financial wealth S11+S14 / GDP) (Median EMU basis 100) 600 500 400 300 200 100 0 -100 2000 2001 2002 2003 2004 2005 2006 -200 2007 2008 20002008 -300 -400 Italy France United Kingdom Spain Germany 18 Net Financial Interrelation Ratio (%), NFIR, Household Sector (S14) by European country NFIR for the Households (net financial wealth S14 / GDP) 200 175 150 125 100 75 50 25 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 20002008 Italy France United Kingdom Spain Germany 19 Financial liabilities on GDP (%) of the whole Non Financial Sector (S11+S13+S14) by European country Financial liabilities on GDP of the whole non fiancial sector (S11+S13+S14) (Median EMU basis 100) 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 20002008 Italy France United Kingdom Spain Germany 20 Financial liabilities on GDP (%) of the Private Non Financial Sector (S11+S14) by European country Financial liabilities on GDP of the private non fiancial sector (S11+S14) (Median EMU basis 100) 160 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 20002008 Italy France United Kingdom Spain Germany 21 Financial liabilities on financial assets (%) Household Sector (S14) by European country Financial liabilities on financial assests for Households sector 60 50 40 30 20 10 0 2000 2001 Italy Spain 2002 2003 2004 France Germany 2005 2006 2007 2008 United Kingdom Median UEM 11 20002008 22 Thanks OECD Working Party - Paris, 30 November 2010 23