Finance sector wages: explaining their high level and growth
Joanne Lindley, Steven McIntosh 21 September 2014
Individuals who work in the finance sector enjoy a significant wage advantage. This column considers three explanations: rent sharing, skill intensity, and task-biased technological change. The UK evidence suggests that rent sharing is the key. The rising premium could then be due to changes in regulation and the increasing complexity of financial products creating more asymmetric information.
Individuals who work in the finance sector enjoy a significant wage advantage. This wage premium has received increasing attention from researchers following the financial crisis, with focus being put onto wages at the top of the distribution in general, and finance sector wages in particular (see Bell and Van Reenen 2010, 2013 for discussion in the UK context). Policymakers have also targeted this wage premium, with the recent implementation of the Capital Requirements Directive capping bankers’ bonuses at a maximum of one year of salary from 2014.
Financial markets Microeconomic regulation
Bankers’ bonuses, banking, wages, Inequality, UK, regulation, asymmetric information, Executive compensation, Finance, task-biased technological change, ICT
Do all firms have equal access to external financing?
Neil Kay, Gavin Murphy, Conor O'Toole, Iulia Siedschlag, Brian O'Connell 29 June 2014
Small and medium-size enterprises (SMEs) often report difficulties in obtaining external finance. Based on new research, this column argues that these difficulties are not due to greater financial risks associated with SMEs. Instead, they are the result of imperfections in the market for external finance that negatively affect smaller and younger enterprises. The same research has shown that these types of firms are also the most reliant on external finance to support their investment and growth.
The proportion of bank loan acceptances has fallen significantly following the crisis, along with the level of enterprise investment. The sharpest falls in both have been in countries hardest hit by the crisis. While in a number of countries – such as Finland, Malta, and Sweden – the declines have been modest, in others – such as in Bulgaria, Ireland, Denmark, Lithuania, Spain, and Greece – they have approached or exceeded 30%.
Figure 1. Percentage change in bank loan acceptances
EU policies Financial markets
investment, lending, credit, Finance, SMEs, credit rationing, borrowing, information asymmetries
Gaps, cracks and lacunae: The finance and growth nexus in low-income countries
Nauro F Campos, Stefan Dercon 01 March 2014
Financial development and growth have long been linked. This column argues that there remain fundamental lacunae in our understanding of the finance-growth nexus. Three main areas for future research are identified: aid, institutions and technology.
Are quantitative and qualitative improvements in financial markets, institutions, instruments, and intermediaries positively and closely associated to the processes of economic growth and development? Does finance cause growth? Once upon a time, economists were deeply divided on these issues. Until about 1990, when endogenous growth gained prominence, there were few economists (notably Joseph Schumpeter) that believed financial development drove growth. The Schumpeterian view is that growth is driven by innovation and innovation is driven by credit. Without finance there is no growth.
growth, Low-income countries, Finance
Informal or formal financing: First evidence on co-funding of Chinese firms
Hans Degryse, Liping Lu, Steven Ongena 21 August 2013
Non-bank financing originating in the shadow banking system has increasingly become an issue for policymakers. This column argues that informal financing has, in fact, been an essential element of corporate performance in China. Through reviewing the interaction between informal and formal financing, evidence suggests that informal financing simultaneously granted with formal financing (co-funding) is helpful for growth, especially for small firms.
The credit squeeze in June 2013 has triggered policymakers’ concern worldwide about a potential debt crisis in China, while at the same time the Chinese government has moved to crack down on undisciplined lending in order to alleviate the debt-bubble fears emanating from the shadow banking system.1
Development Financial markets
China, investment, Finance
Banking crises and political survival over the long run – why Great Expectations matter
Jeffrey Chwieroth, Andrew Walter 10 May 2013
The economic consequences of financial crises have been systematically explored. Their political consequences haven’t. This column argues that without paying attention to politics, crises will remain poorly understood. After all, politics shapes policy choices, market sentiment and, ultimately, economic outcomes. Evidence from the effects of banking crises over the past century show that crises have a dramatic impact on the survival prospects of governments.
The wave of banking and sovereign-debt crises that began in 2007 has had powerful and continuing economic consequences (IMF 2013a; 2013b). Economists have used long run historical data to investigate the economic aftermaths of financial crises, but we lack any equivalent panoramic analysis of the impact of crises on politics. This is an important gap because these political effects, especially the survival prospects of incumbent governments, can shape governments’ post-Crisis policy choices, market sentiment, and thus economic outcomes.
Global crisis Politics and economics
elections, business cycle, Eurozone crisis, Finance
Hair of the dog that bit us: New and improved capital requirements threaten to perpetuate megabank access to a taxpayer put
Edward J Kane 30 January 2013
Do financial institution managers only owe enforceable duties of loyalty, competence and care to their stockholders and explicit creditors, but not to taxpayers or government supervisors? This column argues that in the current information and ethical environments, regulating accounting leverage cannot adequately protect taxpayers from regulation-induced innovation. We ought to aim for establishing enforceable duties of loyalty and care to taxpayers for managers of financial firms. Authorities need to put aside their unreliable, capital proxy: they should measure, control, and price the ebb and flow of safety-net benefits directly.
This column is a lead commentary in the VoxEU Debate "Banking reform: Do we know what has to be done?"
financial regulation, global crisis, Too big to fail, banks, Finance, taxpayers
Why scarce small and medium enterprise financing hinders growth in Latin America: A role for public policies
Rolando Avendaño, Niels Boehm, Elisa Calza 27 January 2013
Small and medium-sized enterprises provide the vast majority of employment in developing countries and are keystones in the productive structures of emerging economies. This column argues that the growth of such firms is being hindered by scarce financing. Looking at Latin America, it is clear that public financial institutions are increasingly important in meeting credit demands. If emerging economies want to see long-term growth, there needs to be a comprehensive approach to reducing the ‘traditional’ barriers to small and medium enterprise financing.
Small and medium enterprises represent a significant share of emerging economies’ business fabric. Nevertheless, they continue to face multiple challenges in meeting their financing needs. Public financial institutions have come to play an active role in addressing these financing gaps through new operational mechanisms and adapted instruments.
Latin America, Finance, SMEs
Information asymmetry raises the cost of capital for corporations
James Choi, Hongjun Yan 25 January 2013
Security-market regulations often seek to ensure that all investors have equal access to information about each company. But what are the actual costs of an unequal information playing field? This column reviews evidence from China, Finland, and the US, suggesting that information asymmetry raises companies’ cost of capital. This inhibits investment and thereby long-run economic growth.
Governments around the world try to level the information playing field among investors by regulating the disclosure of corporate information. But what is the cost of unequal access to information? In this column, we review evidence from the three most recent papers in this area.
Frontiers of economic research International finance
Finance, information asymmetry
Why financial markets are inefficient
Roger E. A. Farmer 22 January 2013
The efficient market hypothesis – in various forms – is at the heart of modern finance and macroeconomics. This column argues that market efficiency is extremely unlikely even without frictions or irrationality. Why? Because there are multiple equilibria, only one of which is Pareto efficient. For all other equilibria, the whims of market participants cause the welfare of the young to vary substantially in a way they would prefer to avoid, if given the choice. This invalidates the first welfare theorem and the idea of financial market efficiency. Central banks should thus dampen excessive market fluctuations.
Writing in a review of Justin Fox’s book The Myth of the Efficient Market, Richard Thaler (2009) has drawn attention to two dimensions of the efficient markets hypothesis, what he refers to as:
Financial markets Macroeconomic policy
efficient market hypothesis, Finance, first welfare theorem, market fluctuations
Implementation of Basel III in the US will bring back the regulatory arbitrage problems under Basel I
Takeo Hoshi 23 December 2012
Rejigging financial regulation is in vogue. But, in the world of international finance, how well do different regulatory systems join up? This column argues that the US Dodd Frank Act and Basel III are, in part, incompatible and that harmonising them may lead to unintended consequences. The US ought to tread carefully here but should also try hard to maintain the spirit of better financial regulation.
This column is a lead commentary in the VoxEU Debate "Banking reform: Do we know what has to be done?"
regulation, banks, Basel, Dodd-Frank, Finance