OECD Says Outsized Finance Sector Hurts Growth, Adds Inequality

An outsized financial industry hurts long-term growth and increases inequality, the Organization for Economic Cooperation and Development said.

“Finance is a vital ingredient of economic growth but there can be too much of it,” the OECD said in “Finance and Inclusive Growth,” a report published Wednesday. “Reforms to make the financial sector more stable can be expected to boost long-term economic growth and improve income equality.”

Lending to households and businesses has grown three times as fast as economic output in developed countries over the past half century, the report said. The Paris-based OECD estimates that in the long term, a further 10 percent increase in the stock of credit in its 34 member countries reduces long-term growth by about 0.3 percentage point.

“Finance is good for growth, but like chocolate, you can have too much of it,” OECD Chief Economist Catherine Mann said in an interview with Bloomberg Television from London. “If you’re lending too much, you’re drawing money away from other parts of the economy.”

Mann will present the report on Wednesday at an event at the London offices of Bloomberg LP.

The report follows a February Bank for International Settlements study that found a finance industry boom doesn’t translate into economic growth because it diverts resources from other companies.

The financial industry’s impact on inequality comes partly from the higher wages paid to its workers, which in part stem from implicit government guarantees of big banks, according to the OECD report.

Top Earners

In Europe, a fifth of the top 1 percent of earners are finance-industry employees, even though they make up only 4 percent of the total workforce. This doesn’t seem to be matched by high productivity, since wages exceed the average for similarly productive employees in other areas.

Abundant credit also benefits the rich more than the poor, the report finds. In the euro area, about 40 percent of all credit is extended to the wealthiest fifth of households, while about 25 percent goes to the next-wealthiest quintile.

“The distribution of credit is twice as unequal as the distribution of household income,” the OECD said. “Therefore credit expansion fuels income inequality as the well-off gain more than others from the investment opportunities they identify.”

The organization, which advises its members on economic policy, advocates the use of macro-prudential tools such as caps on debt-service-to-income ratios to limit credit expansion. Similarly, higher bank-capital requirements reduce their ability to fund lending through liabilities, it said.

Stability could also benefit from the breakup of systemically important banks into smaller institutions that can fail without creating systemic risk.

Substantial progress has already been made,” the OECD said. “However much remains to be done to reduce governments’ implicit support for too-big-to-fail institutions and level the playing field for competition between large and small banks.”