“Over the last half century, the evolution of the finance sector has led to the substitution of transactions for relationships. Long-term relationships have been reduced to short-term transactions. The outcome has been a sector which largely talks to itself, trades with itself, and has increasingly lost touch with the needs of the real economy for financial services. This process of financialization has created a hypertrophied sector, its activities ever more abstract and divorced from the real economy, successful mainly at multiplying the remuneration of its members. Finance has strayed dangerously from its core functions. And the functions themselves have been jumbled in dangerous ways (for example, with -deposit-taking becoming the funding source for uncertain, long-term risk-taking). Within each function, activities have moved from the primary to the derivative — less investing, more trading, fewer assets and more asset-backed securities.”

– John Kay (London School of Economics, Financial Times)

How to reconnect finance with society? That is the challenge formulated by John Kay in his talk in 2015 about his book Other People’s Money. It is being taken up in a number of ways, by people in- and outside the financial sector. This blog post introduces three approaches.

1. Changing the regulatory framework for financial institutions

Regulatory authorities (in the Netherlands for example De Nederlandse Bank and the Authority for the Financial Markets – AFM) have enacted new rules and regulations that enforce the banks’ customer orientation and sound products. The banks themselves came up with a professional code of conduct, the bankers oath, which is broadly implemented. The question is what the effects and prospects are. There are indications that there are also counterproductive effects of detailed rules and regulations on the customers’ behalf.

Theodor Kockelkoren – associate professor at Tilburg University and partner with McKinsey &
Company; previously working at the AFM – proposes an alternative way of supervision by the regulatory authorities: not by enacting more and more rules and regulations, but by means of an ongoing conversation with the banks on the purpose of banking and finance and on its contribution to society. Kockelkoren sets relations and dialogue against transactions and system; value driven against rule driven.

2. Finance for societal impact

Increasingly, owners use their capital expressly to generate societal impact. Thus we see, for example:

  • The new philanthropy. Considerable amounts of money are spent to further social issues such as nature conservation or medical research. These are considered to be private contributions to public goals.
  • Private-public partnerships, e.g. for infrastructural renewal and the energy transition.
  • Social impact bonds, e.g. to combat youth unemployment; green bonds.
  • Impact investing. Investments that are made with the intention to generate societal impact alongside a financial return, while harnessing the positive power of entrepreneurship.

This raises questions concerning the motives, vision, values and intervention theory of impact investing. Apart from those questions, there is this problematic effect of impact investing of further financializing society, i.e. the accelerated substitution of transactions for relations.

3. Embed transactions in relations

The opposite of financialization would be: de-financialization, that is, embedding transactions in relations. According to LansBovenberg, professor of economics at Tilburg University, the quality of the relations between economic actors is positively correlated with their performance, with the resilience of the financial system and of the economy and society as a whole. From this perspective very practical de-financialization policies emanate. “The economy is less vulnerable to financial crises by utilizing more risk capital instead of debt in the financing relationship between asset owners and entrepreneurs.” And the government should further this by “abolishing the fiscal advantage of debt financing and by reducing the taxes on funding with equity, for example by making the cost of equity fiscally deductible for corporate taxation,” he asserts.

 

These three approaches shall be further scrutinized during a seminar on 27 January 2017 organized by Socires. Where do you stand on these thre approaches? Let us know by leaving a comment.

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