Shrink Finance – for prosperity

Why too much finance harms the European economy and society

Our new study shows: an oversized financial sector harms the economy and society. 

  • The size of the financial sector in the eurozone has doubled relative to GDP in the last 20 years.
  • The sector is fulfilling less and less of its original function of lending to firms and households. Instead, many financial transactions take place exclusively within the financial sector.
  • If the financial sector is to be more inclusive again, it must shrink.

Text book economics suggests that the main business of a bank like Deutsche Bank is credit provision. After all, Deutsche Bank grants loans worth 431 billion euros. That sounds like a lot at first and corresponds to more than one tenth of Germany’s gross domestic product (GDP).

But in comparison with the exposure from derivatives, credit provision suddenly appears minuscule. After all, Deutsche Bank’s outstanding derivatives add up to a staggering 32,000 billion euros, or 1,000 percent of Germany’s GDP.

This is just one example from our new study which shows how the financial market has outgrown the economy and society in numerous dimensions.

Many financial transactions take place exclusively within the financial sector. More than 70 percent of European banks’ activities are not focused on lending to households and the real economy. Instead, for example, shares are traded back and forth within milliseconds, to the detriment of all other market participants.

And much of the financial market exists to extract returns from other sectors of the economy. Financial market players such as private equity firms, for instance, restructure care home companies for investors to make a profit, and then leave behind over-indebted companies time and again. In addition, parts of the oversized financial market serve illegitimate or illegal financial activities. In many places, for example, money from illegal transactions can only be fed into the normal economic cycle with the help of banks.

The study paints a clear picture that large parts of the financial market are unnecessary and even harm society and the economy in many places. In the eurozone, the size of the financial sector has doubled relative to GDP in the last 20 years. This trend now needs to be reversed so that the financial sector is once again more at the service of society and the real economy.

Link to the full study: 

Read the entire report on shrinking finance here

Module: Scenario Analysis

Will future crises be induced by financial or climate-related events and how likely are they? We analyse potential causes of future crises.

Module: Central Banking

Central banks are the first line of defence during crises. What should be their role in the transformation and what could reform look like?

Module: Financialisation

Our systems’ short-term focus on financial returns is responsible for our vulnerability to crises. We want to find ways on how to reign in the financial sector.

Module: Growth & Transformation

What are the challenges of continuous low growth and interest rates for the social-ecological transformation?