Banque de France Bulletin no. 226: Article 8 The euro area post crisis financial system in perspective (1999 2018)

By Mouriaux François, Sabatini Mylène, Levy-Garboua Vivien

Thematic: Financial stability and financial system

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How has the euro area financial system changed since the 2007 08 financial crisis? Has it become more resilient or more fragile? This article provides an overview of the main changes since 2007 and puts them in perspective. In particular, it considers the role played by an atypical non bank financial sector player – captive financial institutions – and through them, non financial corporations (NFCs). NFCs’ optimisation and internationalisation strategies could have had a decisive influence in the development of the financial sector. By contrast, traditional banks have only played a secondary role in this development.

1. The euro area financial sector experienced robust and continued growth after the 2007‑08 financial crisis

Euro area financial sector assets continued to grow at a steady pace following the global financial crisis, particularly until 2016. The 2009‑18 period saw an annual average increase of 4%, although this represented a slowdown compared with the 8% per‑year average from 1999 to 2008.

At the end of 2018, assets held by the euro area financial sector amounted to EUR 78,656 billion, or the equivalent of 680% of euro area GDP, compared with 556% of GDP in 2008 (see Table 1 and Box 1). This ratio stood at 406% in 1999.

The development of the financial sector is not unique to the euro area, and its expansion falls between the situation reported in Japan (whose financial sector developed more rapidly in points of GDP) and that of the United States (where development was slower). For example, Japanese financial sector assets as a percentage of GDP increased from 583% at the end of 1999 to 735% at the end of 2017 (with a dip at the end of 2008 to 552%). During the same period in the United States, financial sector assets increased from 394% of GDP at the end of 1999 to 468% at the end of 2008 and 509% at the end of 2017.

2. The non‑bank financial sector, a key player in the euro area financial sector

The share of the banking sector has fallen sharply

Within the financial sector, the relative share of the banking sector (investment funds, including money market funds – MMFs), which had decreased slightly before 2007, has fallen sharply since the global financial crisis (see Chart 1). This is illustrated by the fact that since 2012, annual banking sector financial transactions (including MMFs) have been less than or equal to 5% of GDP, compared with close to 40% of GDP in 2007 and 20% or more from 2004 to 2006 (see Chart 2 below). This decline can be linked to the reduction in interbank market activity with non‑resident counterparties, and post‑crisis regulations that led banks to ring‑fence and limit their own‑portfolio securities trading.

The increase in central banks’ balance sheets remained relatively contained

Central banks’ active use of their balance sheets and the resulting increase in balance sheet size prompted fears of excessive growth. However, when put in perspective with the development of…