Author: David Schwartz J.D. CPA
Sifting the rubble left by the financial crisis has turned up some revealing clues about the causes of the catastrophe. At the same time, this forensic examination has given us an opportunity to do some fundamental thinking about to what extent sheer size of the financial industry contributes to the growth and success of economies, or whether size does more harm than good. There has been much discussion about moral hazard and the "too big to fail" phenomenon; but could it also be true that beyond a certain threshold, the size of the financial sector actually becomes a drag on economic growth rather than an engine? Erkii Liikanen, Governor of the Bank of Finland and Chairman of the Highlevel Expert Group on the Structure of the EU Banking Sector, recently gave remarks in Helsinki raising some interesting points about the direction not only of financial regulatory reform, but the size and utility of the financial sector itself. According to Liikanen, "it is not only the size of the financial sector and banks that is important, but also what the sector does."