Has efficiency improved in the European finance industry?

Ground-breaking research undertaken by Guillaume Bazot in collaboration with the Pensions Insurance Corporation discloses the cost of finance to the end user in the UK, France and Germany over a period of 70 years. Despite the centrality of the UK’s financial services sector in the functioning of the economy, no one has ever measured its cost to the end user, also known as the cost of intermediation.

This measure should be of vital importance to politicians, regulators and the industry itself, because history shows that lowering aggregate costs has significant benefits for the real
economy.

Key findings:

• The UK has consistently had the most cost efficient financial services sector over the
  past 70 years, even more cost efficient than the US
• France saw a dramatic decrease in the cost of financial intermediation following a
  period of deregulation from the 1950s onward
• On current trends, France will have a more cost efficient financial services sector than
  the UK over time
• The cost of intermediation today in the UK is similar to the cost 70 years ago, albeit
  with significant increases in costs prior to “Big Bang”, followed by significant falls.

The paper raises important questions:

• How do we increase the cost efficiency of UK financial services in light of Brexit?
• What are the factors acting to lower the end user cost of financial services, including
  technology, innovation and competition, and how are they counteracted by factors such as abuse of asymmetric information, regulation, risk aversion, short-termism and the sheer growth of financial services over 70 years?
• Taking into account these factors, what is the right level of cost efficiency?
• What do we expect of our financial services industry?

Download the full paper, the third in the Purpose of Finance series, to read more.