Finance is a vital ingredient of economic growth, but there can be too much of it. Over the past 50 years, credit by banks and other institutions to households and businesses has grown three times as fast as economic activity. At these levels, further expansion is likely to slow long-term growth and raise inequality.

How to restore a healthy financial sector that supports long-lasting growth, Policy note

Finance and inclusive growth, Long paper

Press release: Financial sector must promote inclusive growth

See Catherine L Mann, OECD Chief Economist present, the work on ‌

The long-term costs from credit overexpansion fall disproportionately on the socially vulnerable.

 The empirical work suggests three key mechanisms:

1. Financial sector workers are very concentrated at the top of the income distribution

2. High income earners can and do borrow more

3. The growth of stock market capitalisation has contributed to greater income inequality

The main channels linking the long-term increase in credit and slowing growth:

1. Excessive financial deregulation

2. A more pronounced increase in bank lending than bond financing

3. Too-big-to-fail guarantees by the public authorities

4. A lower quality of credit

5. A disproportionate increase in household credit compared with business credit

The policy response: A better architecture for the financial system

Ensuring that the financial sector contributes to strong and equitable growth involves avoiding credit overexpansion, which hurts growth and income equality, and improving the structure of finance:

1. Avoiding credit overexpansion

2. Improving the structure of finance

 The main papers providing background to this note are:

Cournède, B. and O. Denk (2015), “Finance and Economic Growth in OECD and G20 Countries”, OECD Economics Department Working Papers, No. 1223, OECD Publishing, Paris.
Cournède, B., O. Denk and P. Hoeller (2015), “Finance and Inclusive Growth”, OECD Economic Policy Papers, No. 14, OECD Publishing, Paris.
Denk, O. (2015), “Financial Sector Pay and Labour Income Inequality: Evidence from Europe”, OECD Economics Department Working Papers, No. 1225, OECD Publishing, Paris.
Denk, O. and A. Cazenave-Lacroutz (2015), “Household Finance and Income Inequality in the Euro Area”, OECD Economics Department Working Papers, No. 1226, OECD Publishing, Paris.
Denk, O. and B. Cournède (2015), “Finance and Income Inequality in OECD Countries”, OECD Economics Department Working Papers, No. 1224, OECD Publishing, Paris.
Denk, O., S. Schich and B. Cournède (2015), “Why Implicit Bank Debt Guarantees Matter: Some Empirical Evidence”, OECD Journal: Financial Market Trends, Vol. 2014/2, OECD Publishing.