Beyond Financialisation? Transformative Strategies for More Sustainable Financial Markets in the European Union

The global financial crisis has led many regulators and lawmakers to a rethinking about current versus optimum financial market structures and activities that include a variety and even radical ideas about delevaraging and downsizing finance. This paper focuses on the flaws and shortcomings of regulatory reforms of finance and on the necessity of and scope for more radical transformative strategies. With 'crisis economics' back, the most developed countries, including the EU member states, are still on the edge of disaster and confronted with systemic risk. Changes in financial regulation adopted in the aftermath of the financial meltdown have not been radical enough to transform the overall system of finance-driven capitalism towards a more sustainable system with a more embedded finance. The paper discusses financialisation in order to understand the development trends in finance over the past decades and examines various theories to describe the typical trends and patterns in financial regulation. By focusing on a limited number of regulatory reforms in the European Union, the limitations of current reforms and the need for additional transformative strategies necessary to overcome the finance-driven accumulation regime are explored. Finally, the regulatory space for such transformative strategies and for taming finance in times of crisis, austerity, and increased public protest potential is analysed.

Transparency Proposals for European Sovereign Bond Markets

The debate over the possible extension of transparency regulation in Europe to include sovereign bonds has opened up a number of other issues in need of serious consideration. One such issue is the appropriateness of the entire infrastructure supporting the trading of European sovereign bonds. In recent years sovereign issuers have supported the development of an electronic inter-dealer market but have remained unconcerned with the opacity of dealer-to-customer trading. The degree of segmentation in this market is high relative to what exists in nearly all other financial markets. This paper explores why European sovereign bond markets have developed in such a segmented way and considers how this structure could be altered to improve transparency without adversely affecting liquidity, efficiency or the benefits enjoyed by primary dealers and issuers. It is suggested that the structure of the market could be improved greatly if the largest and most active investors were permitted access to the inter-dealer electronic trading platforms. This would solve a number of market imperfections and increase the proportion of market activity that is conducted in a transparent way. The paper argues that sovereign issuers in Europe have the means to provide incentives that would influence dealers to support reduced segmentation. Some practical examples of how this could be achieved are provided and the potential benefits are outlined.

Reconstructing ethical conduct within financial firms

This chapter explores whether ethical cultures can be created within a financial market context. Ongoing regulatory and legal actions, and press coverage of these, suggest that a definition of ethical problems in terms of ‘rogue traders’ and ‘bad apples’ would be inadequate, since entire business areas have been resorting to collusive illegal behaviour. The concept of ‘bad barrels’ seems to capture the situation rather better: the culture of firms fails to discourage transgression and indeed supports it. Unpacking the links between regulatory objectives and the cultural settings of firms and their employees, this chapter questions the chances of success of measures such as enhanced controls on individuals and restructured reward mechanisms. Financial firms typically have very flat, nodal structures, within which traders conceptualise themselves as an elite, in contrast to back office staff and also in contrast to managers. Traders’ functions and their occupational mobility mean that their linkages and attachments may be much stronger with others outside ‘their’ firm than their firm and those within it. Performance, camaraderie and their linkages are important in all work situations, yet all the more so for traders in financial markets. Thus, whether regulators and senior management combine to send a clear and consistent message to traders – or whether the logic of the financial marketplace leads some firms to continue send conflicting or ambivalent messages to them – misconduct is likely to continue to be a tough nut to crack.

Capital Markets Union and ending short-termism: lessons from the European Commission's public consultation

The European Commission’s initiative to establish a Capital Markets Union is in sharp conflict with the more radical goals of downsizing significantly certain financial activities and firms that have become too-big-to-fail and too-big-to-govern and of ending or at least drastically limiting extreme speculation and short-termism in finance and the real economy in order to increase financial stability. The recent public consultation on the Commission’s Green Paper Building a Capital Markets Union gives evidence of how weak such demands are compared to calls for deeper capital markets with more ‘shadow banking’ and rebuilding (sound) securitisation. The consultation is an example of how framing the problem and the refined better regulation agenda influence post-crisis financial reregulation and help to marginalize more radical ideas demanding a return to a more traditional banking model and transforming finance back to serving the real economy.

The Cost of Sustainability Capital and the Creation of Sustainable Value by Companies

We develop and apply a valuation methodology to calculate the cost of sustainability capital, and, eventually, sustainable value creation of companies. Sustainable development posits that decisions must take into account all forms of capital rather than just economic capital. We develop a methodology that allows calculation of the costs that are associated with the use of different forms of capital. Our methodology borrows the idea from financial economics that the return on capital has to cover the cost of capital. Capital costs are determined as opportunity costs, that is, the forgone returns that would have been created by alternative investments. We apply and extend the logic of opportunity costs to the valuation not only of economic capital but also of other forms of capital. This allows (a) integrated analysis of use of different forms of capital based on a value-based aggregation of different forms of capital, (b) determination of the opportunity cost of a bundle of different forms of capital used in a company, called cost of sustainability capital, (c) calculation of sustainability efficiency of companies, and (d) calculation of sustainable value creation, that is, the value above the cost of sustainability capital. By expanding the well-established logic of the valuation of economic capital in financial markets to cover other forms of capital, we provide a methodology that allows determination of the most efficient allocation of sustainability capital for sustainable value creation in companies. We demonstrate the practicability of the methodology by the valuation of the sustainability performance of British Petroleum (BP).