(h) The Contribution of the Financial System to the Economy and to Society: One of the striking features of the past several decades has been the rising share of financial services in measures of economy-wide value-added and, in tandem, rising financial sector balance sheets as a fraction of GDP in a number of economies. Sometimes this goes by the name “financialisation”. There are good reasons to think increasing financial depth is a natural feature of economies as they grow and develop. Indeed, there is a fairly well-established literature quantifying the boost to growth and productivity which arises from financial depth, especially for developing countries (Levine et al (2000)). Latterly, however, the question has been asked whether it is possible to have too much of a good thing. Some have asked why the cost of financial intermediation continues to rise and what this might signal about the efficiency of financial services as an industry (Friedman (2009), Philippon (2015)). Others have pointed to a possible U-shaped relationship between measures of financial depth and productivity and growth (Cecchetti and Kharroubi (2012), Heil (2017)). These questions have an important bearing on the contribution the financial system makes to the economy and to society. They are also meta-questions for regulatory policy. They warrant further research. (i) Financial Stability Implications of FinTech: Technologically-enabled innovation in financial services, or FinTech, has grown rapidly in recent years. The FSB’s recent report contains a useful taxonomy of such innovations (FSB (2017f)).
This highlights the importance of funding metrics which consider the overall extent to which illiquid assets are supported by unstable sources of funding. If banks are running a high degree of structural maturity transformation, this increases the risk of failure. While one could envisage a range of possible structural funding metrics, including a loan-to-deposit ratio, the Basel III NSFR is designed with these risks in mind. The NSFR speaks directly to a market failure that arises from a market-wide loss of wholesale funding, the like of which was exhibited during the crisis. In this way, it may potentially reduce the probability of damaging asset fire-sales, liquidity hoarding and contractions in lending which may otherwise result. The NSFR is also likely to complement the leverage ratio in acting as a brake on too-rapid balance sheet expansion. The leverage ratio ensures that any such expansion is supported by higher capital. The NSFR ensures any such expansion is supported by more stable funding sources. None of this is to suggest that these risks could not be met with a different, and perhaps smaller, set of regulatory constraints. Cecchetti and Kashyap (2016) have recently argued that the LCR or NSFR may be redundant as one of the constraints is always slack in their simplified bank balance sheet model. Put differently, the existing system of financial regulation may be over-identified. On the other hand, the horizon for assessing banks’ liquidity risk may matter.