A preesentation held by Ms Karoliina Ekholm, deputy governor of the Swedish Riksbank, at the high level seminar "Towards a sustainable financial system", hosted by the Stockholm based Think Tank Global Challenge in cooperation with London School of Economics and The Swedish House of Financie on the 12th of September

1. Karolina Ekholm, Deputy Governor
12 September, 2013
How to incentivize
the financial
system to support
investments in the
real economy…

2. Karolina Ekholm, Deputy Governor
12 September, 2013
…or…
How to create a
stable financial
system that
fosters economic
growth?

3. Does financial development promote
growth?
GDP per capita and financial development
Source: Phillippon and Reshef, “An international look at the growth of Modern

4. Maybe only up to a point…
Private credit to GDP and growth
Source: Cecchetti and Kharroubi, ”Reassessing the impact of finance on growth”, 2012

5. Regulatory reform leads to changes in the
financial sector
Regulatory
reform
Enhance
d
financial
stability
More and
better capital
Stronger
liquidity
framework
More
transparency
Systemic risk
perspective
A more
sustain-
able
financial
system
Stronger
real
economy

6. Decline in investments to GDP in
advanced economies…
Gross capital formation, per cent of GDP
Source: IMF World Economic Outlook April 2013
15
17
19
21
23
25
27
29
31
33
15
17
19
21
23
25
27
29
31
33
92 94 96 98 00 02 04 06 08 10 12
Major advanced economies Euro area
Other advanced economies Emerging markets

7. …accompanied by decline in
corporate credit to GDP
Credit to non-financial corporations, per cent of GDP
60
70
80
90
100
110
120
130
00 01 02 03 04 05 06 07 08 09 10 11 12
Euro area UK US Japan
Source: BIS Banking Statistics

8. Decline in bank lending to
corporations in the euro area
Corporate lending in the euro area, annual percentage change
Source: ECB SDW
Note. Core represents Germany, Netherlands and France

9. Stricter supply and less demand for
corporate loans in the euro area
Weighted net percentages, dotted lines: forward looking
Source: ECB Lending Survey

10. Does higher capital requirements
have a negative effect on growth?
 Yes, is the typical response from banks.
 No, according to Admati and Hellwig (2013).
 The only problem is that shareholders are reluctant to issue new
equity because it would benefit creditors at the expense of
shareholders.
 Maybe, according to Aghion (2013).
 They may inhibit lending to firms in sectors with lower asset
tangibility, which are typically the most innovative ones.

11. Conclusions
 A larger financial sector is not necessarily better from a
long-run growth perspective.
 The current low levels of investment and corporate
lending in advanced economies are probably mainly due
to expectations of a weak development of demand.
 They should not be used as arguments for watering
down proposals of financial sector reform.
 Such reform is needed to making the aggregate
economy resilient to large adverse shocks.

12. Extra

13. Decline in private sector debt
Private non-financial sector debt, per cent of GDP
Source: BIS 83rd Annual Report, 2012-2013

14. Low growth of loans to private non-
financial sector
Annual percentage change
Source: BIS

15. Global imbalances hold back global
demand
Current accounts, per cent of world GDP
Source: IMF World Economic Outlook April 2013
-3
-2
-1
0
1
2
3
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
US Germany and Japan
Euro area ex Germany Developing Asia
Middle East and North Africa Other advanced economies
Other economies Discrepancy

16. Different views about the balance
between debt vs equity
1
3
2 1 32
Source: Anat Admati, What’s wrong with banking and what to do about it, 2013

17. Financial crises have large negative
impacts on GDP per capita
JapanUS UK
Korea Mexico Sweden
Source: BIS

18. MFI lending to households and
corporations in Sweden
Per cent, July 2013
Sources: SCB and the Riksbank