Jan F Qvigstad: Contribution at the conference on “Welfare effects of financial innovation” Comments by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), on Mr Frank Smets (ECB) paper “Financial markets – productivity, procyclicality, and policy”, at the Netherlands Bank conference in honour of Mr Nout Wellink on “Welfare effects of financial innovation”, Amsterdam, 11 November 2011. *  *  *  I would like to thank Birger Vikøren, Sigbjørn Atle Berg and Helle Snellingen for useful comments. Thank you for inviting me and giving me the opportunity to comment on Frank’s paper. The common starting point of the literature is that the value of financial markets lies in their contribution to real economic growth. This is the perspective we always need to have for any meaningful discussion of the social value of financial markets. A well developed financial market is not a goal in its own right. During my 30 years of service in the Treasury and the central bank, I have had my fair share of dealings with banking and financial crises. I will draw on some of that experience in my comments today as part of my modest contribution to this distinguished group. In the aftermath of the Lehman Brothers collapse the funding situation for banks became difficult, also for Norway with its oil-driven economy. Early in 2009 a swap arrangement was introduced to improve the medium-term funding situation for our banks.
When making that assessment, we have to take into account that Iceland’s recession was the result  2  BIS central bankers’ speeches  of two stories: the macroeconomic boom-bust cycle in a small, open, and financially integrated economy, and the rise and collapse of three cross-border banks operating on the basis of EU legislation. The first is familiar, and Iceland was already on its way into a recession as a result of it when the banks collapsed. The second was unique at the time, as it occurred during the first international financial crisis since the birth of the EU single market. Iceland lost around 12% of GDP from peak to trough during the recession. But the recovery began in the middle of 2010, and the Central Bank forecast from February is that Iceland’s economy will grow by just over 2% this year. The recovery has already reduced the seasonally adjusted unemployment rate from over 9% at the peak to around 4½%. New banks, smaller and domestically oriented, have been rebuilt. But there are still significant legacy issues and challenges, including capital controls and inflation expectations well above target. Source: Philippon (2008): The Evolution of the US Financial Industry from 1860–2007. Source: Philippon and Reshef (2008): Wages and Human Capital in the US Financial Industry 1909–2006. BIS central bankers’ speeches  3  Before I close, let me expand my scope again and say a few words about possible broad long-term future trends regarding the relative size and importance of the financial sector.