ABSTRACT
It has long been assumed that marketisation would undermine banks, a claim reflected in the common opposition of market and bank-based finance. But as recent research shows, some banks have flourished in the marketized environment of financialisation. I argue the reason they have come to dominate financialisation stems from a revolution in funding that began in the 1960s with the rise of liability management. This practice enabled some banks to dramatically leverage their operations and expand their balance sheet. The new funding practice also impacted the business model of US banks fuelling a move from lending to trading. As I show, this revolution in finance shifted the power away from lenders and towards leveraging financial agents that focused on capturing assets through predatorial strategies.
Acknowledgements
I would like to thank Mareike Beck, Sahil J. Dutta, Michael Hamilton, Erin Lockwood, Nils Peters and Stefano Sgambati for their comments and helpful suggestions.
Disclosure Statement
No potential conflict of interest was reported by the author(s).
Notes
1 While it would be an exaggeration to say that borrowers in general have been empowered by financialisation, and this is certainly not the case for most households (but see Jordà et al. Citation2019), it is clear that in the corporate world those who can leverage in effective ways have been able to use their new found flexibility to great effects. Sgambati (Citation2019) proposes a useful distinction to help us here between debt and leverage. The former refers to borrowing in order to settle obligations or make payments, while leverage refers to borrowing in order to invest in further assets to make a profit (leverage). In that respect, I speak of the power of borrowers to refer to leveraging.
2 An early contribution along those lines was made by James Crotty. Writing in 2007, he accepted that the globalisation of banking had intensified competition, but believed that various forces were mitigating these competitive pressures. Four factors in particular, he argued, allowed banks to maintain healthy margins in a context of financialisation: the rise in demand for financial products and services which countered the pressure on the supply side, the rise of wholesale financial markets, the increased risk and leveraging that compensated for lower profit rates in the economy and the shift towards OTC that are less regulated and thus competitive.
3 Starting with my first point about practices, I build here on the work of Stefano Sgambati to argue that we should conceive of the power of banks fundamentally as a matter of leverage, that is the ability of banks to do more with what they have. In an innovative series of articles, Sgambati (Citation2016, Citation2019) argues that the ability of banks to exert power does not come from their role in channelling resources of the community towards profitable uses, but more fundamentally from their ability to issue debt use loans as a means to leverage their activities.
4 While banks usually operate as both borrowers and lenders on the money markets, the dynamics of empowerment in today's financial markets are increasingly predicated on the process of leveraging rather than lending. The big sources of profits for banks through the years have not come from their role as market makers and liquidity providers.
5 The rise of shareholder activism in the late 1980s somewhat changed the dynamic, although not as much as often believed (see Knafo and Dutta Citation2020). It is important to point out that it was the corporate raiders (i.e. other corporate managers) who led the way, not shareholders per se, for reasons that fit the argument about the power of leverage made here (see below).
6 Endogenous theories of credit, which highlight the ease with which banks can create money, have only reinforced a tendency in the literature to neglect the question of funding, or treat it as secondary matter for understanding the dynamics of finance. Although recent literature influenced by the money view and the work of Perry Mehrling has brought liabilities back into focus (Mehrling Citation2010, Tooze Citation2018), funding is still mostly discussed as a function of risk taking by banks, rather than as a capacity in its own right.
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Samuel Knafo
Samuel Knafo is a Reader in International Relations at the University of Sussex. He is the author of the Making of Modern Finance: Liberal Governance and the Gold Standard and writes about neoliberalism, shareholder value and financialisation.