Financialisation as a result of the network economy's development

Cichorska, Joanna; Klimontowicz, Monika Article Financialisation as a result of the network economy's development e-Finanse: Financial Internet Quarterly Provided in Cooperation with: University of Information Technology and Management, Rzeszów Suggested Citation: Cichorska, Joanna; Klimontowicz, Monika (2016) : Financialisation as a result of the network economy's development, e-Finanse: Financial Internet Quarterly, ISSN 1734-039X, University of Information Technology and Management, Rzeszów, Vol. 12, Iss. 2, pp. 1-12, https://doi.org/10.14636/1734-039X_12_2_001 This Version is available at: https://hdl.handle.net/10419/197431 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0 www.e-fi nanse.com University of Information Technology and Management in Rzeszów 1 The arti cle is an eff ect of the project –„Financializati onimpact on the economy and society”- internati onal conference, conducted by the University of Informati on Technology and Management in Rzeszów with Narodowy Bank Polski under the scope of economic educati on programme Joanna Cichorska1, Monika Klimontowicz2 Abstract In the last thirty years, the world’s economies have changed signifi cantly. New technology developments have enabled the transiti on from the industrial economy to the network economy. The network economy is based on informati on technology, connecti vity and human knowledge. Its development has caused changes in the way of life, consumer behaviour on the markets and companies’ business models, especially the process of goods and services creati on and distributi on. Electronic commerce and services have become one of the fastest developing fi elds of the economy. As a result, the role of government has diminished while the role of markets has increased economic transacti ons between countries and their citi zens have substanti ally risen, and fi nancial transacti ons have grown remarkably. This changing landscape has been characterised by globalizati on and fi nancialisati on. The increasing role of fi nancial moti ves, fi nancial markets, and fi nancial insti tuti ons have infl uenced domesti c and internati onal transacti ons. A new category of fi nance called e-fi nance has been created and implemented. Despite the advantages of electronic fi nance networks, concurrently there are some disadvantages of their diff usion. The purpose of the paper is to present both aspects of fi nancialisati on and its infl uence on the fi nancial and banking system. This purpose determines the structure of the paper. As fi nancialisati on is a relati vely new term the fi rst secti on of the paper focuses on defi ning its phenomenon. This part presents diff erent authors’ perspecti ves and defi niti ons. Next, the infl uence of fi nancialisati on on the Polish fi nancial system’s quanti tati ve and qualitati ve structure is discussed. The last secti on focuses on the current role and functi ons of banks in the fi nance system network structure as a result of a rapidly changing technological environment. 1 University of Economics in Katowice, e-mail: jcichorsk[email protected]owice.pl. 2 University of Economics in Katowice, e-mail: mklimon[email protected]atowice.pl. FINANCIALISATION AS A RESULT OF THE NETWORK ECONOMY’S DEVELOPMENT Financial Internet Quarterly „e-Finanse” 2016, vol.13/ nr 2, s. 1-12 DOI: 10.14636/1734-039X_12_2_001 JEL classifi cati on: G21, D53, O33, O43 Keywords: fi nancialisati on, network economy, banking network structure Received: 07.05.2015 Accepted: 11.12.2015 www.e-fi nanse.com University of Information Technology and Management in Rzeszów 2 „e-Finanse” 2016, vol. 13 / nr 2 Joanna Cichorska, Monika Klimontowicz Financialisation as a result of the network economy’s development The arti cle is an eff ect of the project –„Financializati onimpact on the economy and society”- internati onal conference, conducted by the University of Informati on Technology and Management in Rzeszów with Narodowy Bank Polski under the scope of economic educati on programme Introduction The modern economy, called the money-goods economy, has been subordinated to money circulati on since the industrial revoluti on. Money has become the conditi on and the basis of goods’ creati on, gathering, division and exchange. Both the economic and social spheres rely on the access to cash and cash equivalents. The process of contemporary civilisati on’s creati on is inextricably interlinked with money and other funds. As a result, the role and importance of fi nancial insti tuti ons have been systemati cally increasing. According to Merton (1993), fi nancial intermediati on is usually analysed in the context of the structure of fi nancial insti tuti ons or their functi ons. The fi rst perspecti ve focuses on existi ng fi nancial intermediaries as banks, insurance companies, mutual funds, and others, and their market performance and the conditi ons that help them to remain stable. In contrast, the functi onal perspecti ve does not posit that existi ng insti tuti ons, whether operati ng or regulatory, will necessarily be preserved. It assumes that fi nancial functi ons are more stable than fi nancial insti tuti ons which means that functi ons change less over the ti me and vary less across geopoliti cal boundaries. Furthermore, according to this approach, competi ti on will cause the changes in insti tuti onal structure to evolve toward greater effi ciency in the performance of the fi nancial system. This functi onal perspecti ve goes together with a dynamic approach to intermediati on and is useful for analysing both micro and macro issues evolving within the fi nancial system. As the importance of fi nancial insti tuti ons’ specifi c functi ons and objecti ves for the economy’s development have been changing over the last few decades this approach seems to be adequate for analysing the process of its fi nancialisati on and is applied in this paper. As fi nancialisati on is a relati vely new term the fi rst secti on of the paper describes its taxonomy. The opinions on fi nancialisati on are sti ll very much in fl ux, and the analysis of its phenomenon is quite tentati ve. This part of the paper presents diff erent perspecti ves and att empts to defi ne it. It further discusses the infl uence of fi nancialisati on on the Polish fi nancial system. The last secti on presents the banks as the dominant intermediaries on the Polish fi nancial market and their role and functi ons in the fi nance system network structure in an environment of rapidly changing technology and fi nancial innovati ons. The theoreti cal, empirical, managerial and public policy implicati ons of fi nancialisati on are quite vast. Even the parti al synthesis of the subject must, therefore, be selecti ve in the comparison with the complex whole. Thus, from the substanti ve perspecti ve, the paper should be treated as a foundati on for further research. Nevertheless, the paper serves a current synthesis of understanding fi nancialisati on and presents its impact on the nati onal economy, banking sector and society. The taxonomy of financialisation The recent crisis has renewed investi gati ons into the paramount role that fi nance plays in present day capitalism. Today individuals, fi rms and the macroeconomy are increasingly mediated by new relati onships with a fi nancial market. Financialisati on combines quanti tati ve assessments of new accumulati on processes and patt erns with qualitati ve analyses of fi nance as socio-cultural change. In general, the literature on fi nancialisati on provides a powerful account of how fi nance is increasingly embedded in contemporary social, politi cal and economic life (Montgomerie, 2008). Criti cs of fi nancialisati on emphasise the extraordinary levels of remunerati on paid to those at the top of the fi nancial industry and state that something is wrong in society today. Whereas its supporters respond that, in most countries, fi nance is one of the most successful sectors, contributi ng hugely to the economy through employment, taxes paid and exports. The fi nancial crisis of the last fi ve years has revealed the signifi cant risks associated with having a large fi nancial sector. This situati on has led to a more sympatheti c hearing for those who criti cise fi nance and fi nancialisati on: the increased role of fi nancial insti tuti ons, markets and agents in the economy. (Dolphin, 2012). The channels of fi nancial sector interests spread over the whole economy are illustrated in Figure 1. The fi rst channel concerns the structure and operati on of fi nancial markets. The second channel aff ects the behaviour of market actors (individual customers and non-fi nancial corporati ons) while the third channel concerns economic policy. Though not shown in the diagram for reasons of simplicity, these channels also interact. Thus, economic policy aff ects the structure of fi nancial markets and changes customers and organisati ons’ market behaviour. On the other hand, market actors also lobby to aff ect economic policy. www.e-fi nanse.com University of Information Technology and Management in Rzeszów 3 „e-Finanse” 2016, vol. 13 / nr 2 Joanna Cichorska, Monika Klimontowicz Financialisation as a result of the network economy’s development The arti cle is an eff ect of the project –„Financializati onimpact on the economy and society”- internati onal conference, conducted by the University of Informati on Technology and Management in Rzeszów with Narodowy Bank Polski under the scope of economic educati on programme Financialisati on is a relati vely new term. There is sti ll no common agreement about its defi niti on and even less about its signifi cance. In general, the most frequently cited is Epstein’s defi niti on. According to Epstein (2005), fi nancialisati on means the increasing role of fi nancial moti ves, fi nancial markets, fi nancial actors and fi nancial insti tuti ons in the operati on of the domesti c and internati onal economies. This broad defi niti on suits most purposes. It encompasses most of the aspects of fi nancialisati on that economists and other commentators have chosen to emphasise at various ti mes over the last ten years. Among them fi nancialisati on is considered in the context of: the rapid growth of fi nancial acti viti es relati ve to the rest of the economy characterised by value accommodati on (an increasing share of total output or value-added)made rather in fi nancial than in the producti ve or commercial sphere (Freeman, 2010), 1) an increase in politi cal power, which has caused policymakers to give a disproporti onate weight to the needs of the fi nancial sector in their considerati ons, and so to an increase in politi cal inequality (Palley, 2007), 2) an increased parti cipati on of fi nancial players in commodity markets which changes the nature of the informati on that drives commodity price formati on (Flassbeck, 2012), 3) an ever increasing number of markets that exist to exchange a wide range of fi nancial products and assets. Exoti c names such as swapti ons, mezzanine fi nance or other diff erent acronyms add layers of complexity to constantly innovati ng practi ces (Montgomerie, 2008), 4) the rapid growth in the capital market associated with a surge in fi nancial trading (especially over-thecounter) and in the types of fi nancial instruments, parti cularly derivati ves, available to trade, 5) shareholder value and the impact of the stock market’s increasing demands for fi nancial returns on corporate behaviour and performance (Gleadle & Cornelius, 2008; Andersson et al., 2010), 6) the increased household and company debt (Palley, 2007), 7) the internati onal capital fl ows enabled by the relaxati on of capital controls (O’Connell, 2005, BarbosaFilho, 2005). These diff erent perspecti ves are refl ected in the defi niti ons of fi nancialisati on. Despite Epstein’s neutral defi niti on, fi nancialisati on is seen by most authors as an unwelcome phenomenon (see Table 1). Financialisati on can be considered in the narrow and broad sense. The narrow perspecti ve discusses the growing importance of fi nance in non-fi nancial companies’ market acti vity which results in the increase of fi nancial revenues’ share in non-fi nancial revenues. The broad atti tude to fi nancialisati on focuses on fi nancial sphere autonomisati on and gaining the dominant positi on in the economy in the relati on to the real sphere (Ratajczak, 2012). Both perspecti ves emphasise the economy’s and social life dependency on the fi nance sector’s development which is usually criti cised. Regardless of defi niti on and the presented opinions, the data presented in this paper leave litt le doubt about the importance of fi nancialisati on in recent years and its impact on fi nancial systems and the role of banks in the network economy. Figure 1: The channels of fi nancialisati on Financial Sector Interests Economic Policy Market Behaviour Financial Markets Economic Outcome Source: Own work www.e-fi nanse.com University of Information Technology and Management in Rzeszów 4 „e-Finanse” 2016, vol. 13 / nr 2 Joanna Cichorska, Monika Klimontowicz Financialisation as a result of the network economy’s development The arti cle is an eff ect of the project –„Financializati onimpact on the economy and society”- internati onal conference, conducted by the University of Informati on Technology and Management in Rzeszów with Narodowy Bank Polski under the scope of economic educati on programme Financial system development as a result of financialisation The fi nancial system plays a signifi cant role in the process of a country’ economic development. The fundamental changes in the Polish fi nancial system started in the 1990s. The major part of a general restructuring of the Polish economic system from one based on central planning and government ownership of a business to one based on free market and private ownership was the fi nancial system reform. The history of free retail banking in Poland started in 1998. The new Act of Banking introduced a regulati on that enabled the establishment of non-state banks in Poland. The primary functi on of any fi nancial system is to facilitate the allocati on and deployment of economic resources in an uncertain environment. The fi nancial system should also provide: 1) a payment system for the exchange of goods and services, 2) a mechanism for pooling of funds to undertake the large-scale indivisible enterprise, 3) a way to transfer economic resources through ti me and across regions and industries, 4) a way to manage uncertainty and control risk, 5) price informati on that helps coordinate decentralised decision-making in various sectors of the economy, 6) a way to deal with the asymmetric informati on problem when one party to a fi nancial transacti on has informati on that the other party does not. From the functi onal perspecti ve, the fi nancial system insti tuti onal form follows its functi on (Merton, 1993). Figure 2 shows the Polish contemporary fi nancial system Table 1: The selected defi niti ons of fi nancialisati on Author The defi niti on of fi nancialisati on Hilferding (1981) the increasing politi cal and economic power of a parti cular class grouping: the renti er class (an increasing concentrati on and centralizati on of capital in large corporati ons, cartels, trusts and banks) Strange (1986) casino capitalism – the unregulated excesses of fi nancial markets associated with the ‘boom and bust’ cycles of large speculati ve ventures Krippner (2004) the patt ern of accumulati on in which profi t making occurs increasingly through fi nancial channels rather than through trade and commodity producti on Gunnoe et al. (2010) the overarching shift from producti ve to fi nancial forms of capital accumulati on Epstein (2005) the increasing role of fi nancial moti ves, fi nancial markets, fi nancial actors and fi nancial insti tuti ons in the operati on of the domesti c and internati onal economies Froud et al. (2006) the process that leads to coupon pool capitalism1, where the capital market stands between households and fi rms both of which invest in coupons or securiti es. Under fi nancialisati on, the behaviour of companies is changed so as to create open dynamics and variable results disti nguished by instability, reversibility, and unpredictability. Ratajczak (2009) a new stage of capitalism called stock market capitalism, coupon capitalism or annuity capitalism Dembinski (2011) the system of current human relati onships, moulded by the fi nancial and market model: impersonal, short-term, calculati ng and mistrusti ng characterized by afocus on profi ts made by fi nancial instruments’ investments Księżyk (2013) free market euphoria and investment utopia as a foundati on of profi t maximisati on Source: Own work based on: Epstein, 2005; Gleadle & Cornelius 2008; Peet, 2011; Dolphin, 2012; Carrol & Jarvis, 2014; Gostomski, 2014 1 Froud et al. (2002, p. 120) defi ne coupon pool capitalism as existi ng ‘where the fi nancial markets are no longer simple intermediaries between household savers and investi ng fi rms but act dynamically to shape thebehaviour of both fi rms and households (as cited in Gleadle & Cornelius, 2008, p. 1220). www.e-fi nanse.com University of Information Technology and Management in Rzeszów 5 „e-Finanse” 2016, vol. 13 / nr 2 Joanna Cichorska, Monika Klimontowicz Financialisation as a result of the network economy’s development The arti cle is an eff ect of the project –„Financializati onimpact on the economy and society”- internati onal conference, conducted by the University of Informati on Technology and Management in Rzeszów with Narodowy Bank Polski under the scope of economic educati on programme structure. The system consists of the fi nancial insti tuti ons and markets as well as the regulati ons and the basic payment system through which virtually all transacti ons clear. The Polish fi nancial system is a bank-based model. The analysis of fi nancialisati on in European bank-based fi nancial systems mostly focuses on equity (Stockhammer, 2004). The global, network aspect of fi nancialisati on can be seen in the transformati on of the economy and social life made by a wave of mergers and acquisiti ons from large Western European banks (Raviv, 2007). They signifi cantly impacted the performance and structure of the enti re banking sector (Kozak, 2013). As a result, a considerable amount of Polish banks’ equity (63,2%) is controlled by foreign investors (Klimontowicz, 2015). The origin of capital is Italian, German, Dutch and Spanish (see Figure 3). Mergers and acquisiti ons lead to the creati on of a fi nancial insti tuti onal new segment called Systemati cally Important Insti tuti ons (SII). They are strategically important for internati onal fi nancial markets and characterised by large size and numerous business links Figure 2: The structure of the Polish fi nancial system FINANCIAL SYSTEM FINANCIAL INSTITUTIONS ⋅ National Bank of Poland ⋅ Polish Supervision Authority ⋅ Bank Guarantee Fund ⋅ clearing house KIR ⋅ commercial banks ⋅ insurance agencies ⋅ funds ⋅ brokerage houses FINANCIAL MARKETS ⋅ money market ⋅ capital market ⋅ credit markets ⋅ foreign exchange market REGULATIONS ⋅ acts ⋅ ordinances ⋅ recommendations on capital adequacy requirements, leverage ratio, buffers of liquid assets, capital buffers, risks (credit, liquidity, market, operational), etc. ⋅ market analyses and forecasts ⋅ stability reports ⋅ warnings FINANCIAL SECURITIES ⋅ equity based instruments ⋅ debt based instruments ALLOCATION STABILITY TRANSFER INFORMATION Source: Own work Figure 3: The foreign investors’ share in Polish banking sector assets (2013) Source: Polish Financial Supervisory Authority (2014) www.e-fi nanse.com University of Information Technology and Management in Rzeszów 6 „e-Finanse” 2016, vol. 13 / nr 2 Joanna Cichorska, Monika Klimontowicz Financialisation as a result of the network economy’s development The arti cle is an eff ect of the project –„Financializati onimpact on the economy and society”- internati onal conference, conducted by the University of Informati on Technology and Management in Rzeszów with Narodowy Bank Polski under the scope of economic educati on programme (McGrane et al., 2014). Other, smaller insti tuti ons may also be systemati cally important if they act on the market as a group. In this case, they can create or increase the systemic risk. That is why the most crucial criterion is the number and strength of links or the level of leverage. The concentrati on of the fi nancial insti tuti ons’ size becomes aless important factor also when fi nancial product and services are highly substi tutable (Cichorska, 2015). The other results of fi nancialisati on include the increase of: 1) number of fi nancial insti tuti ons and their assets per capita, 2) number of bank accounts and daily sett lements, 3) enti ti es and individuals’ dependence on intermediaries and outside funds, 4) credits’ number and value, 5) number of fi nancial securiti es, including derivati ve securiti es, 6) invest funds on the internati onal market, 7) the turnover on the stock market and other-thecounter markets, 8) fi nancial insti tuti ons’ viability by the increase of actual profi t margin, 9) the importance of fi nancial insti tuti ons’ creati on of gross nati onal income. The fi rst of the fi nancialisati on consequences is the increase in fi nancial insti tuti ons’ number. For seven years, this number increased from 1082 to 1457 (35% increase). The largest increase has been recorded by investment funds – 164%, while the number of cooperati ve banks has decreased which is the result of banking sector consolidati on. The number of commercial banks remains stable (see Table 2). An even higher pace than the number of fi nancial insti tuti ons was noted in the increase of their assets. In 2013 fi nancial insti tuti ons total assets in the relati on to 2006 increased by 48,78%. In this period, the value of assets’ share in GDP also increased. This rati o shows the degree of market saturati on and fi nancial sector contributi on to the building of economic growth. In 2013, the relati on of fi nancial insti tuti ons’ assets to GDP was 126,1% which means 30% growth compared with 2006 (see Figure 4). When the level of the market saturati on index is higher than 100%, it shows a good situati on in the fi nancial sector. In Poland, it is sti ll lower than in eurozone countries where its level is 480,8%. The biggest share in the structure of fi nancial insti tuti ons’ assets was held by banks. In 2006-2013, the average level of this share was 69,32% of total fi nancial assets. Since 2008 when it reached the higher level of 73,7% the share of banks’ assets has slowly declined to the level of 67,1%in 2013 (see Figure 5). Banks are systemati cally, but slowly, losing their market share to the benefi t of investment funds and open pension funds. The future of banks’ intermediati on will be infl uenced by fi nancial market development. Financial markets are examined as an insti tuti onal alternati ve to fi nancial intermediaries and replace traditi onal intermediaries as the main provider of many fi nancial products (Merton, 1993, p. 19). The next result of fi nancialisati on is the increase of credits and other fi nancial securiti es’ number and value. The level of fi nancing the economic growth by these services is measured by their relati on to GDP. In Poland, the level of market saturati on measured by this rati o remains low (below 100%) – see Figure 6. In comparison in Europe the rati o level is over 400%. It means that in general the Polish borrowers are sti ll dependent on banks to a small extent. Despite the small decrease of share in fi nancial market Table 2: The number of fi nancial insti tuti ons in Poland (2006-2013) Enti ty: 2006 2007 2008 2009 2010 2011 2012 2013 Commercial banks 60 61 67 64 67 66 68 67 Cooperati ve banks 584 581 579 576 576 574 572 571 SKOK 70 67 62 62 59 59 55 55 Insurance agencies 65 67 66 64 63 61 59 58 Investment funds 241 277 319 369 407 482 580 636 Pension funds 15 15 14 14 14 14 14 13 Brokerage houses 47 53 58 59 50 51 53 57 Total: 1082 1121 1165 1208 1236 1307 1401 1457 Source: Nati onal Bank of Poland (2014) www.e-fi nanse.com University of Information Technology and Management in Rzeszów 7 „e-Finanse” 2016, vol. 13 / nr 2 Joanna Cichorska, Monika Klimontowicz Financialisation as a result of the network economy’s development The arti cle is an eff ect of the project –„Financializati onimpact on the economy and society”- internati onal conference, conducted by the University of Informati on Technology and Management in Rzeszów with Narodowy Bank Polski under the scope of economic educati on programme Figure 4: The value of fi nancial insti tuti ons’ assets and assets-to-GDP rati o (2006-2013) Source: Nati onal Bank of Poland (2014) Figure 5: The structure of fi nancial insti tuti ons’ assets (2006-2013) Source: Nati onal Bank of Poland (2014) www.e-fi nanse.com University of Information Technology and Management in Rzeszów 8 „e-Finanse” 2016, vol. 13 / nr 2 Joanna Cichorska, Monika Klimontowicz Financialisation as a result of the network economy’s development The arti cle is an eff ect of the project –„Financializati onimpact on the economy and society”- internati onal conference, conducted by the University of Informati on Technology and Management in Rzeszów with Narodowy Bank Polski under the scope of economic educati on programme assets, banks remain the crucial fi nancial insti tuti ons in Poland. They play a signifi cant role in the money creati on process and infl uence the stability of the whole fi nancial sector. As banks adopted new equity market prerogati ves to generate revenue, the European model has been adapted to the onslaught of foreign ideas and ownership (Vitols, 2004; Johal & Leaver, 2007). So far fi nancialisati on in Poland does not engage with global aspects, virtually ignoring important geopoliti cal dynamics. As a result, fi nancialisati on off ers an insular account of fi nancial markets’ impact on socio-economic life. The role of banks in a network economy The contemporary banking system is characterised by the increase of horizontal insti tuti onal structures’ importance. These structures create links between enti ti es, markets, diff erent kinds of securiti es and distributi on channels. These links infl uence the banking system development. The ability to create networks results in the increase of effi ciency. In the complicated framework of links and interplays, the basic foundati on of this process is rather building the supplier-user than the seller-buyer relati on. This process is accompanied by (Paszkowski, 2008): 1) the decrease of tangible assets’ importance, 2) the conversion of traditi onal services into virtual services, 3) the increase of intellectual knowledge and property’s importance, 4) focusing rather on marketi ng and building longterm relati ons than on sales, 5) the commercialisati on of interpersonal relati ons and human experiences. The cooperati on networks may diff er in nature and are not always equivalent to legal forms and enti ti es. Taking into account the market coverage the banking networks can be divided into internati onal (e.g. large fi nancial and banking conglomerates), domesti c (e.g. commercial banks) and local (e.g. cooperati ve banks) networks. These networks are madeup of bank branches, other companies of the capital group, clearing houses and safety net enti ti es. The banking networks’ links and interplays have a multi lateral or bilateral character. They create dense or dispersed structures. The dense structures usually have a tangible character (branches’ operati onal acti vity and resource management) while dispersed structures are rather intangible (informati on exchange, cultural exchange, lobbying, etc.). Creati on of the internal and external banking networks has changed the banking system remarkably. New communicati on possibiliti es enable the creati on of diff erent kinds and levels of banks’ cooperati on with subsidiaries and other enti ti es. Developed network relati ons may infl uence customers’ decisions and let Figure 6: The structure of fi nancial insti tuti ons’ assets (2006-2013) Source: Nati onal Bank of Poland (2010, 2014), GUS