The development of increasingly trans-nationalized (‘globalized’) financial markets raises several key issues for the analysis of politics, public policy, and the national state. It can be suggested that financial globalization increasingly constrains policymakers and circumscribes the policy capacity of the state. After carefully examining at a range of approaches to the process of financial globalization itself, it was reasonably concluded that technological change is the main independent variable, by reducing transaction costs and dramatically increasing the price sensitivity of financial markets across borders, at the same time making economies of scale a possibility. These very developments have an effect throughout the domestic and international economies. They, in turn, make obsolescent the political economies of scale — the governance structures — which have characterized economic policy in modern states, undermining the capacity of the state to manufacture public goods. At the same time, globalized financial markets interact with rapidly changing interest group structures and divided structures of state, especially through ‘regulatory arbitrage.’ Without the development of transnational regimes capable of regulating global financial markets, the structural basis of the national state itself is undermined.
Market structures in the financial services industry have been transformed with a process, and at the core of this process of transformation, catalysing and accelerating other changes has been technological change in finance in general terms and particularly the transnational financial services sector. These changes have led to a quantum jump in the sensitivity of prices of financial instruments across the world, drawing market actors big and smalland their capitalinto the search for paper profits. Global financial structural changes have in turn driven the evolution of a range of structural developments both in the widernational and international economyand in the forms of the state apparatus engaged not only in financial market regulation but also in wider economic policy, again, on both domestic and international levels. The centrality of finance and financial markets to economic change has been dramatically recaptured by technological change, leading to a new hegemony of financial markets in a more open and interdependent world. This new global transformation has gravely challenged the capacity of the state to provide effective governance not only of financial markets themselves, but also of economic affairs generally.
Since the global financial crisis began in 2007, gross cross-border capital flows have fallen by 65 percent in absolute terms and by four times relative to the world’s GDP. Half of the decline has come due to a contraction in cross-border lending. But financial globalization is still very much alive—and could turn out to be more stable and inclusive in the future.
- Eurozone banks are at the epicentre of the retreat in cross-border lending, with the total foreign loans and other claims down by $7.3 trillion, or by 45 percent, since 2007. Nearly half of it has occurred in intra-Eurozone borrowing, with interbank lending showing the largest decline. Swiss, UK, and some US banks also reduced their foreign business.
- The retrenchment of global banks portrays several factors: a reappraisal of country risk; recognition of the fact that foreign business was less profitable than domestic business for many banks; national policies that promote domestic lending; and new regulations on capital and liquidity that created disincentives for the added scale and complexity that foreign operations entail. Some banks from developing and other advanced developed economies—notably China, Canada, and Japan—are expanding abroad, but it is yet to be seen whether their new international business is profitable and sustained. Central banks are also playing a huge role in banking and capital markets.
- Financial globalization is not dead. The global stock of foreign investment relative to GDP hasn’t changes much since 2007, and more countries are getting involved. Notably, China’s connectedness is growing, with outward stock of bank lending and foreign direct investment (FDI) has tripled since 2007. The new era of financial globalization promises much more stability. Less volatile FDI and equity flows now commands a higher share of gross capital flows than before the crisis. Imbalances of current, financial, and capital accounts have shrunk, from 2.5 percent of world GDP in 2007 to 1.7 percent in 2016. Developing countries have transformed into net recipients of global capital again.
- But potential risks remain. Capital flows—particularly foreign lending—remain volatile. Over 60 percent of countries experience a large decline, surge, or reversal in foreign lending each year, creating volatility in exchange rates and economies. Equity-market valuations have reached new heights. Financial contagion remains a risk. The rise of financial centres, particularly those that lack transparency, is worth watching.
- Looking forward, new digital platforms, blockchain, and machine learning may invent new channels for cross-border capital flows and leading to further broadening participation. Banks need to capitalize the power of digital and respond to financial technology companies or FinTech’s, adapt business models to new rules and regulations, improve risk management, and review their global strategies. Regulators will need to continue to monitor old risks and find new methods to cope with volatility.
Ten years after the start of the global financial crisis, new prospects of financial globalization are emerging. The confident expansion into foreign markets by large Western banks has been replaced by retrenchment, conservatism, and a renewed domestic focus. Some banks from other countries have swum against the tide, though not in sufficient numbers or strength to outweigh the general retrenchment. But it would be a mistake to conclude that financial globalization has lurched into reverse gear. The stock of foreign investment among countries compared with the size of the global economy has changed little since 2007 and stands at close to twice the global GDP, reflecting the intricate web of financial ties that bind countries. If anything, financial globalization is broadening as developing economies—most notably China—become more connected. Furthermore, lessons have been learned from the crisis, and regulators have stepped in to restore stability. Old risks remain, and new ones are coming as digital technologies are set to create a very different form of financial globalization. Regulators need to keep pace, and banks need to reconsider traditional models if they are to sustain in the years to come.
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