Banks’ contribution to economy overstated

Economists query how statisticians measure role of banks in creating wealth

Central Bank

Central Bank

Fri, Apr 5, 2013, 06:22

The contribution of Ireland’s financial sector to the economy is likely to have been overstated, particularly after the financial crisis took hold, a new article published by the Central Bank has claimed.

The paper, written by Mary Everett, Joe McNeil and Gillian Phelan, said the financial sector is credited with adding €15 billion in added value, according to national accounts for 2011.

The research highlighted shortcomings in how the concept of added value is calculated, including the omission of capital gains and losses and losses incurred on impaired loans and transfers to Nama.

The inclusion of risk into the calculations would also reduce the value of banks’ output, particularly in the years before the crisis.

Added value is measured through the wages paid to employees in the financial sector and operating surpluses, or profits, made by the institutions. In 2011, wages paid by all financial institutions accounted for €6 billion of value added in the economy, with operating surpluses at €9 billion. Combined that amounted 10 per cent of GDP, compared with 4 per cent of GDP as an average in the euro zone.

“It is important that the measure of added value is reflective of economic reality,” the document said.

“Given the capital transfers and injections by the State of €63.1 billion into Irish banks, it is puzzling why they contribute any value to the economy in the recent past.”

Capital transfers
State supports were recorded as capital transfers, which accounted for €42.7 billion, and the acquisition of financial assets, which covered the remaining €20.4 billion. Although the transfer would negatively impact the Government balance sheet it added to the financial sector’s wealth.

Ireland’s financial sector – both domestic activities and internationally-traded financial services – had total assets of €3.6 trillion in the second quarter of 2012, representing 2,147 per cent of the country’s gross domestic product.

Credit institutions were responsible for more than €1 trillion, with investment funds accounting for €957 billion.