David Uren at The Australian this morning picks up on BIS comments about Australia’s enormous banks:
The performance of Australia’s banking sector is seen by world investors and our own authorities as one of the great sources of our economic strength since the global financial crisis.
However, research by the Bank for International Settlements suggests the dominance of Australia’s finance industry contains the seeds of economic vulnerability.
Finance has grown too big around the world and cross-border lending too large, according to BIS chief economist Stephen Cecchetti.
“Experience shows that a growing financial system is great for a while — until it isn’t,” he told the BIS annual conference in Switzerland, arguing there is an optimal size beyond which the financial industry drags down the rest of the economy.
Australia’s finance sector is larger than BIS recommends on the metrics it has developed.
Its studies, based on analysis of the banking systems of 22 countries, including Australia, over a 30-year period, show the finance sector starts subtracting from growth when it accounts for more than 6.5 per cent of value added and more than 3.2 per cent of employment.
In Australia, the finance sector accounts for 11.5 per cent of all industry value added, having doubled its share of the economy since the mid-1980s.
This compares with the 2008 peak of 7.7 per cent in the US and 10.4 per cent in Ireland.
Australia’s finance sector employs 3.7 per cent of the national workforce, which is less than the 4.1 per cent in the US but more than Britain’s 3.5 per cent.
Cecchetti contends that excessive growth in the finance sector leads to disruptive indebtedness, delivering poor economic returns — he cites the three-car garage — and drains resources from more productive sectors of the economy. “Finance’s large rewards attract the best and the brightest,” he says.
Naaaaah!
