Money-centre banks’ growth strategies in turbulent times: the rise of a megabank-centred shadow banking system that now shapes global financial architecture - ICN Business School

Money-centre banks’ growth strategies in turbulent times: the rise of a megabank-centred shadow banking system that now shapes global financial architecture

The term financialization denotes the increasing centrality of finance and financial behaviours in contemporary capitalism. Two broad explanations of financialization have emerged in the literature: one emphasising ‘the growth of the financial sector in its operations, power, etc.’ and a second emphasising ‘a stage or epoch of capitalism’. D’Avino et al (2019) aim to fill this gap by exploring one of the microfoundational roots of financialization, the rise of megabanking. In addition, they answer to two questions about financialization processes: what are their drivers? And can they continue indefinitely, or are they unsustainable?

Financialization: how to define it?

While analysts agree that technological change and deregulation have altered not only financial instruments and institutions but the nature of economic reproduction, they disagree profoundly about the implications and stability of this transformation.

 According to Shiller (2012) and Mehrling (2012), the consolidation of a shadow-bank-augmented system of market-driven finance will permit more efficient, less disruptive risk-sharing. By contrast, Dumenil and Levy (2010) argue that financialization has triggered a new, crisis-prone stage of capitalism, which will require a managerial approach to rein in its self-destructive tendencies. Finally, Christophers (2016) view financialization as a stop-gap measure buying time for a failing post-Golden Age capitalism.

These analyses’ disagreements over the systemic implications—the future—of financialization can be traced in part to the absence of sustained attention to the role of banking firms in driving this secular shift forward. Accounting for the drivers of financialization processes solely at the macro level overlooks the problems of how these processes came about and whether they are sustainable. If an expansion in finance has filled in a widening gap between economic units’ capacity to pay and their demand for goods and services, how did this happen? What micro-level behavioural and organisational shifts on the financial supply side have met this expanded demand for finance?

What are the drivers of financialization processes?

Megabanks are large banking institutions that have diversified away from traditional deposit-taking and loan-issuing activities towards riskier fees generating ones such as investment banking activities. D’Avino et al show that US money-centre banks’ strategies for expanding profits in the 1960s, centring on competition through innovation, led both to these banks’ growth into megabanks and to their increased risk-taking: in the 1980s, they were given ‘too big to fail’ protection so as to avoid systemic financial crisis.

Megabanks’ race for financial profits in the 1990s and 2000s was stimulated by rapid technical change and deregulation in financial markets and instruments. This has led to their being too big to manage. The global growth of financialization has permitted megabanks to seek out excessive profits by expanding the scale and scope of globalised financial markets. Their sometimes ruinous competition over market share and return has come at the cost of the coherence of their own business models and of increased financial fragility in the economy as a whole. This provides the key to understanding why financialization may be unsustainable in the longer run.

What are the sources of instability of the economy today?

According to D’Avino et al a key independent microeconomic driver of increasing financialization is determined by the incessant efforts by money-centre banks in the USA to break out of Depression-era restrictions on their size, activities, and markets. These banks’ growth strategies in turbulent times led to an institutional shift—the rise of a megabank-centred shadow banking system—that now shapes global financial architecture. In short, too-big-to-manage megabanks are at the heart of the fragility and instability of the economy today.

 

From the research paper

Cerpa Vielma N., Cömert H., D’Avino C., Dymski G., Kaltenbrunner A.,  Petratou E., Shabani M. (2019) “Too big to manage: US megabanks’ competition by innovation and the microfoundations of financialization”,Cambridge Journal of Economics, Volume 43, Issue 4, July 2019, Pages 1103–1121,

 

Biography

Carmela D’Avino-Dumas holds a PhD from the University of Venice (Italy) where she wrote a thesis on applied banking. Before joining ICN Business School in 2018, Carmela was senior lecturer in financial economics at the University of East London, and research economist at the Banque de France. Her research output has been published by a number of international scientific journals such as Cambridge journal of Economics, Economic Modelling and Economics Letters.

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