'How efficient is the European finance industry?' with Dr Guillaume Bazot

This dinner will discuss a challenging new paper by Dr Guillaume Bazot, a French academic at the University of Paris VIII, on ‘How efficient is the European financial industry?’. The paper is part of The Purpose Finance initiative on which New Financial is collaborating with David Pitt-Watson, fellow in finance at Cambridge University, and Pension Insurance Corporation.

Given the importance of finance in supporting growth and investment, it is surprising how little research addresses the basic question of how well the finance industry fulfils its basic purpose. One notable exception is the work of Thomas Philippon , professor of finance at NYU Stern, whose research has shown that in the US, the finance industry that helped fund the internet in the 21st century is no more efficient than the finance industry that funded the railroads more than a hundred years ago.

This draft paper by Guillaume Bazot builds on this debate by measuring the efficiency of the finance industry in Europe over the past 70 years. The paper compares the cost of the finance industry over time relative to the amount of money it has ‘intermediated’ (that is, the savings it has received and invested from the outside world). The study compares France, Germany, the UK and the US since 1950, and demonstrates that the finance industry has not delivered the sort of gains in efficiency that you might expect given its growth, the vast progress made by technology, the deregulation of markets, and the increase in competition.

The paper raises some challenging questions. The first is why, in the past, we have not considered or measured the efficiency of the industry. That would seem to be an important starting point for any discussion about the nature and structure of finance, how the industry fits into the wider economy, and the way in which it is regulated.

This discussion will feed into a final version of the paper that will be published and distributed by New Financial later this year.