Financial services and the recession

It is a truism that financial services in general and the banks in particular played a key role in the speculative bubble that led to the recent Great Recession. We know from the published Scottish GVA data that Scottish financial services contracted rapidly while output volumes held up better in the UK. Between 2007 and 2009 financial services real GVA fell by about 7% in Scotland, while GVA in UK financial service rose slightly by 0.3%. The recently published Regional Economic Activity (GVA) data allows us to analyse sectoral performance across the UK regions up to 2009. What is slightly surprising from these data is just how much the share of the financial service sector rose in each region between 2007 and 2009 - see chart.

These data are expressed in nominal terms. They show the share of UK financial services rising by more than 2 percentage points from 8% to over 10%, while its share in London rose by 4% points from 17% to 21%. The share of financial services also rose in Scotland from 7% of total GVA to 9%, despite the large drop in volume.

So, what is going on here? It is not clear. There may be some differences in the two data sources. There may also be the effect of timing as more volume was lost in the sector after 2009. But there is still a puzzle.

Is it because firms in the sector were able to push up prices and charges? Anecdotal evidence from many firms in receipt of loans suggests that that did happen. The Governor of the Bank of England is on record as being concerned about the lack of competition in UK banking and the funding of SMEs. But, on the other hand, competition in the sector is high from the evidence in international studies. For example, the UK ranked 11th out of 49 on a sophisticated measure (H statistic) of competitiveness of its banking system in Claessens and Laeven, 2004. Also a high degree of competition in banking can encourage excessive risk taking and cause problems similar to those that led to the credit crunch.

But still there is a puzzle here. Anyone got any views?

Comments

[Texas angel investor]

Financial services firms enjoyed something of a rebound in 2009 but did not perform all that spectacularly in 2010. For that reason, these firms have not been among investors' favorites.