Against (the idea of) financial markets

Geoforum 66 (2015) 85–93 Contents lists available at ScienceDirect Geoforum journal homepage: www.elsevier.com/locate/geoforum Against (the idea of) financial markets Brett Christophers Department of Social and Economic Geography, Uppsala University, PO Box 513, Uppsala 75120, Sweden a r t i c l e i n f o Article history: Received 21 April 2015 Received in revised form 15 September 2015 Accepted 18 September 2015 Keywords: Finance Markets Banks Financial systems Disintermediation a b s t r a c t The difference between bank-based and market-based financial systems is a longstanding and influential conceptual staple of the interdisciplinary literature on finance. This dualistic model has been subjected to wide-ranging critiques over the past decade. Yet, while those critiques productively problematize the relationship between banks and markets presumed by the model, they fail to address the underlying distinction between banks and markets that is also presumed by the model. This article questions that distinction. It argues that financial markets are best understood not as places or platforms where banks and other financial actors come to interact – and thus as essentially separate from banks – but, instead, as, in large part, their interaction; as constituted by it. The article further argues for the political as well as scholarly importance of reconfiguring our ideas of what financial markets are. The idea of markets as separate, reified phenomena not only underpins the scholarly model of bank- and market-based financial systems – it does political work in the wider world, with the appeal to financial markets or, more nebulously, ‘‘the market” to rationalize and justify political decision-making having become a commonplace of contemporary public policy discourse. Ó 2015 Elsevier Ltd. All rights reserved. 1. Introduction A conceptual mainstay of the vast interdisciplinary literature on finance has long been the basic distinction between bank-based and market-based financial systems. In a stylized bank-based system, banks represent the primary conduits and directors of financial flows. Corporations secure financing from banks; and those banks play the dominant role in aggregating savings, allocating capital, and managing financial risk. In a market-based system, banks are much less prominent, although not absent. Financial markets, rather than banks, are the principal sources of financing for corporations and serve as society’s main vehicles of capital allocation and financial risk management. In the literature in question, these two alternative models are commonly used to describe and classify the financial systems of different countries. During the past decade, a variety of criticisms have been levelled at this dualistic figuring of financial systems (e.g. Adrian and Shin, 2010; Allen et al., 2004; Hardie et al., 2013; Song and Thakor, 2010). This article seeks to deepen and extend this critique. It does so by problematizing a distinction that the existing critique has failed adequately to question, but which is nonetheless fundamental to the bank-based versus market-based dualism. This is the underlying, prior distinction between banks and markets per se. E-mail address: [email protected] http://dx.doi.org/10.1016/j.geoforum.2015.09.011 0016-7185/Ó 2015 Elsevier Ltd. All rights reserved. At the heart of the differentiation between bank-based and market-based financial systems is the premise that banks and markets belong to different orders of things – that they are ontologically distinguishable. On the one hand there are things called markets; on the other hand there are banks (or, more generally, financial institutions). To be sure, the two can and do interrelate: banks and other financial institutions are said to be active in financial markets, alongside other economic actors. But, the very notion that one (the bank) can operate in or on the other (the market) implies separability and difference. Indeed, if banks and markets were not essentially different things, then it would be pointless to categorize financial systems on the singular basis of the distinction between them. The article suggests that this distinction relies on and reproduces a problematic notion of what financial markets are and of what happens in them, and it argues for an alternative figuring of markets, particularly vis-à-vis their relations with banks and other financial institutions. In the literature on financial systems, and in most critical readings of it, markets are depicted as sites where competitive and chiefly anonymous economic transactions occur. But it is misleading to think of financial markets this way. First, even in nominally market-based financial systems, banks and other financial institutions frequently wield substantial influence, manifesting inter alia as power over and hence the capacity to ‘‘move” the very markets whose prominence – according to the stylized model – ostensibly obviates systemic bank promi- 86 B. Christophers / Geoforum 66 (2015) 85–93 nence. Such markets are seldom anonymous or perfectly competitive; they are more often institutionally concentrated and hierarchical. Second, and more importantly, this depiction of markets – as sites for transacting – sets those markets apart ontologically: it gives them a reality and vitality of their own, including a purported capacity to ‘‘discipline” (Lane, 1993) the financial institutions that come to them, from elsewhere, to engage. The article suggests that financial markets are more accurately and productively figured not so much as the (separable) location or context for the interaction of such institutions (and others), but as, in large measure, such interaction. This is not meant to suggest that the concentrated nature of the banking sector is not already widely recognized. It clearly is, both in scholarship and in public policy discourse. The post-financial crisis regulatory and scholarly debates about ‘‘too big to fail” (TBTF) financial institutions are exemplars of such recognition. Yet, crucially, such debates invariably posit TBTF as and only as a banking problem, and not (also) as a financial-market problem; markets are bracketed out and left largely unquestioned. Similarly, postcrisis debates about financial markets typically bracket out banking in turn. The prime example of this has been economists turning their guns, belatedly, on the ‘‘efficient market hypothesis” (EMH), which asserted that financial markets always correctly price assets given the available information. In now dismissing this hypothesis, economists have appealed to behavioral finance and its critique of traditional assumptions about the small, anonymous investors of market lore, who, it transpires, ‘‘bear little resemblance to the cool calculators of efficient-market theory: they’re all too subject to herd behavior, to bouts of irrational exuberance and unwarranted panic”; and who, even when trying ‘‘to base their decisions on cool calculation often find that they can’t, that problems of trust, credibility and limited collateral force them to run with the herd” (Krugman, 2009). In other words, just as TBTF is conceived as a banking problem unrelated to financial markets, financial market inefficiency seemingly had nothing to do with banks. These post-crisis debates, in short, both reflect and reinforce the tenuous but deeply-entrenched distinction between markets and banks. The particular contribution of the present article lies not in diagnosing the concentrated nature of the banking sector, but in insisting that structural banking-sector issues such as concentration are at once structural financial-market issues, and vice versa: institutional concentration is a feature of financial markets, just as it is of financial services markets (Christophers, 2013). That the figurative separation of banks and markets characterizes not only academic convention but public policy discourses such as that relating to TBTF banks, meanwhile, underscores a central reason for critiquing that separation in the first place. As well as being analytically misleading, the idea of ‘‘the market” as being somehow detached and distinct from the banking and other financial institutions that dominate it has power insofar as this abstracted ideational market does political work in the world. Specifically, the increasing tendency for ‘‘the market” or (financial) markets to be invoked as the ultimate arbiter of public policy is among the most striking politico-discursive developments of recent times. When governments contemplate policy interventions they openly wonder and predict how the market will respond. Similarly, once decisions have been taken, the markets’ reaction is viewed as a measure of the wisdom of the chosen course; sometimes markets ‘‘cheer” such decisions while on other occasions, more ominously, the market gives a ‘‘thumbs down.” More generally, the market’s judgement – real or anticipated – steers policymakers in certain directions and threatens to punish them when they veer off-course. This phenomenon exemplifies the wider ‘‘logic” of market-based justification and rationalization of social action and worth elucidated by Boltanski and Thévenot (2006), the logic of the ‘‘market world” representing, in their schema, one of six principal such logics. This particular logic, as Taylor (2004: 6) avers, has come to assume an almost spiritual quality; ‘‘omniscient, omnipotent, and omnipresent,” the market, Taylor claims, ‘‘has become God.” The positioning of the market as touchstone of policy suitability is problematic in at least two senses. First, there is the simple question of the grounds for policy appraisal. The more the financial markets become the arbiter of political sense and possibility, the more it is the case that what the state elects to do is based not on, say, democratic acceptability, or utilitarian considerations, or even on what is considered ‘‘right” and just, but on financial terms. The second problem relates to accountability. When the market is the yardstick for evaluation of public policy, such evaluation becomes unattributable and, therefore, unaccountable. Instead of a definable and broadly ‘‘locatable” socio-spatial constituency – the ‘‘American public,” or the United Nations, or foreign governments – serving, willingly/wittingly or otherwise, as source of political legitimation, such legitimation is tied to an amorphous ‘‘market” notable precisely for being socially and spatially unmoored, characterized as that market putatively is by ‘‘an invisible hand that works through self-interested, dispersed participants who adjust their choices to price signals” (Knorr Cetina, 2012: 115). Rhetorical referencing of ‘‘the market” ultimately conjures an accountability black-hole. With the buck being metaphorically passed to an all-powerful, but never tangible, political– financial master, it becomes impossible to determine who is adjudicating on public policy, or, therefore, to call them to account. To the degree that the market appealed to in this public policy discourse is ever specified, it tends to be the (sovereign) bond and foreign exchange markets – such markets determining the value and viability of sovereign debt and currency – or the stock market – stock prices having become something of a general barometer for the economic future. The post-crisis period, as well as featuring debate around (separate) banking (TBTF) and market (EMH) issues, has of course seen an intensification of the discourse of market arbitration. Numerous governments have justified austerity policies with the explicit rationale that ‘‘the market” would exact retribution (i.e. downgrading sovereign debt) were a contrary course of action pursued. While this discourse warrants unpacking on several grounds – it is, for example, overtly gendered, commentators routinely seeing fit ‘‘to ask Mr. Market what he thinks of all this” (Peston, 2014) – it is the imputation of agency to (reified, godlike) markets that is of central interest here. Markets come to appear, in Langley’s (2014: 68) words, as ‘‘a known thing or object,” regarded even by practitioners ‘‘as independent and external to them, as having an agency and ‘life of their own’.” In the process, the agency of those who participate in markets is actively veiled. The discourse of ‘‘Mr. Market” gives no sense, in particular, that major financial institutions feature in market dynamics, still less that they frequently play a dominant role. All of this may seem to take us a considerable distance from the academic market-versus-bank distinction that underwrites the categorical duality of market-based and bank-based financial systems, and that this article aims to deconstruct. On the one hand we have public policy discourse; on the other, a scholarly model. The academic distinction between markets and banks does not necessarily underwrite or actively figure in the public discourse that reifies the market and obscures banks. It would clearly be fanciful to imagine, therefore, that deconstruction of the academic distinction can directly contribute to challenging the reified market of contemporary governance and the problematic political work that this discursive construct performs. Yet, neither is it certain that the scholarly model and the policy discourse are entirely disconnected, or will necessarily remain so. Dismantling the academic distinction likely will not disturb the caricatured market of political rhetoric; B. Christophers / Geoforum 66 (2015) 85–93 but it is difficult to envisage effective critique of the latter while the former remains solidly in place. As such, what follows represents a critique of a scholarly figuring of financial markets that is, at the very least, comparable in basic form to an influential public-policy figuring. These figurings represent a crucial (dis)figurative moment in the history of the idea of markets. The article argues instead for a figuring of financial markets in which banks and other financial institutions are not just centrally but constitutively implicated. Interaction between such institutions is a major component of what financial markets are. Accordingly, when governments express concern about ‘‘market reaction,” their concern ultimately relates to a significant degree, knowingly or not, to the reaction of banks and bankers. There was, therefore, a very real knowingness to then president-elect Bill Clinton’s infamous alleged response in 1993 to economists’ advice about the politics of U.S. deficit reduction. Contrast the familiar rhetoric of one Financial Times opinion-writer’s warning concerning the communication of President Obama’s own deficitreduction plans – that ‘‘markets will not look kindly on good intentions alone” (Miller, 2009) – with Clinton’s altogether more precise earlier lament (Woodward, 1994: 84): ‘‘You mean to tell me that the success of the program and my reelection hinges on the Federal Reserve and a bunch of fucking bond traders?” The article proceeds in three subsequent parts. The next section introduces the scholarly model – that which distinguishes between bank- and market-based financial systems – that subsequent sections aim critically to unpick: its essential form, its conceptual basis, and its continued enlistment. The third section begins to problematize this model by considering existing critiques thereof. It has not gone uncontested. These critiques are important and instructive for the criticisms they make, certainly, but arguably more so for what they leave unchallenged. In particular, the model’s dualistic ontology remains intact. It is this ontology that the fourth and final section, in advocating a very different understanding – or figuring – of financial markets and of their relation to financial institutions such as banks, attempts to unsettle. The article then concludes by proposing that when discussing and analyzing finance, if not abandoning market-based models and metaphors altogether, we should at least be judicious about their employment: not because (financial) markets do not exist (c.f. Miller, 2002) – they patently do – but because the prevailing idea of financial markets tends to conceal rather more than it reveals. 2. Levering banks and markets apart The literature on financial systems is associated most closely with mainstream finance scholarship and with the ‘‘varieties of capitalism” approach to political economy. Where this literature distinguishes between bank- and market-based systems, it identifies a number of key differences. In the former type, banks are the linchpins of financial intermediation, playing the pivotal allocative role: it is primarily they who intermediate between those with capital to spare (and hence lend, at a cost) and those seeking to borrow such capital. Individuals and, more pointedly, companies are funded mainly through direct bank financing; and the financing needs of banks, in turn, are covered by a combination of central bank funding and savers’ deposits. As such, the vast bulk of the assets and liabilities that constitute the financial system’s lifeblood in this scenario are simple bank deposits and loans. The latter include residential mortgages, which banks retain on their balance sheets. Where companies issue tradable debt or equity securities, these account for only a small proportion of corporate financing requirements, and the capital markets in which such securities circulate are small and relatively undeveloped. 87 In a market-based system, by contrast, financial markets assume the central allocative role occupied by banks under the former model. They are able to do so because a much greater proportion of the system’s financial assets and liabilities are markettradable securities as opposed to vanilla deposits and loans. Such securities include not only the bonds and equities that companies issue and place in markets to fund their operations, but frequently also derivatives (options, futures, swaps) thereof, and securitized packages of mortgages and other debts – where investors purchase exposure to the income streams generated by those underlying assets. In short, banks play a much less critical role. The assets and liabilities fixed on banks’ balance sheets in the bank-based model are replaced by securitized products circulating freely in market environments. The literature in which this dichotomous model is laid out is a large and influential one. It is also, at times, a confusing one, not least because different commentators sometimes use different terms to signify the differences in question. Two notable interventions in the debate represent cases in point. First, Allen and Gale (1997) discuss not bank- and market-based systems but rather ‘‘intermediated” and market-based systems, the latter representing instances where banks have been explicitly disintermediated by markets (French and Leyshon, 2004: 267–271). Second, Rajan and Zingales (2003) dispense with both of the conventional signifiers: for them, the most meaningful way of signifying the key differences is by using instead the labels ‘‘relationship-based” and ‘‘arm’s length” (somewhat akin to Dewatripont and Maskin’s (1995) distinction between ‘‘centralized” and ‘‘decentralized” systems). The former type, Rajan and Zingales posit, ‘‘ensures a return to the financier by granting her some power over the firm being financed,” for instance (although not exclusively) in her capacity as ‘‘the sole or main lender”; in the latter, meanwhile, ‘‘the firm will be able to tap a wider circle of potential lenders” (pp. 11– 12). Semantic variations notwithstanding, the two types nonetheless represent, for Rajan and Zingales just as for users of the more traditional terminology, ‘‘two polar forms of financing”; Erturk and Solari (2007: 372) index, similarly, ‘‘a binary historical opposition.” The nature and allocative vehicles of finance are fundamentally different in each case. The literature also identifies nominally-trademark real-world exemplars to match up with each of the conceptual ideal-types. For the bank-based system, Japan and Germany – and, indeed, continental Europe more generally – have long been seen as paradigmatic, whereas the United States and the United Kingdom are regarded as archetypes of the market-based system. One question that has long animated the literature on these two systems is that of their historical roots: why, that is to say, did finance evolve in such different ways in these different places? Lapavitsas (2002) intimates that ideas are an important part of this story. The two different systems display different historicalintellectual lineages: the bank-based model approximates more to the views on banking and finance of James Steuart and the mercantilist tradition, while the views of Adam Smith and other prominent early critics of mercantilism conceptually underwrite a market-based approach. Yet, as Vitols (2001) notes, explanations for the historical divergence are more commonly located in political economy on the ground than in books. The favored account has long been the so-called ‘‘timing of industrialization” thesis (e.g. Gershenkron, 1962; Lazonick and O’Sullivan, 1997a,b; c.f. Sylla, 1998), which submits that the relative earliness or tardiness of the beginning of the process of industrialization substantially determined the nature of the financial system that ultimately crystallized; the United Kingdom is the classic example of an early industrializer, with Germany and Japan being seen as examples of late industrialization, where bank-based systems were necessary to enable ‘‘catch-up” (Vitols, 2001: 172–174). Vitols, for his 88 B. Christophers / Geoforum 66 (2015) 85–93 part, offers a rather different interpretation. For him, the degree and nature of state regulation was the crucial factor behind system divergence. This alternative reading of causes, moreover, leads Vitols to suggest a different chronology, with financial-systemic differences between the countries in question emerging much later – in the 1930s and 1940s – than hitherto suggested. At the same time, a significant amount of research has been dedicated to answering what are seen to be more pressing, policy-related questions. Which model, that is to say, is preferable or ‘‘best” – in terms either of risk diversification and management (Allen and Gale, 1997) or, more commonly, of relative allocative efficiencies (e.g. Bhattacharya and Chiesa, 1995; Yosha, 1995)? Here, surveying the literature, Rajan and Zingales (2003: 2) usefully summarize: Relationship-based systems perform better when markets and firms are smaller, when legal protection is weaker, when there is little transparency, and when innovation is mostly incremental, rather than revolutionary. By contrast, arm’s-length financing delivers superior results when markets and firms are bigger, when firms are more formally organized, when there is better legal enforcement and transparency, and when innovation tends to be more revolutionary. A relationship-based system can provide better forms of insurance, but it does that at the cost of reducing access to financing and curtailing future opportunities. It also relies heavily on implicit or explicit government guarantees. Finally, a relationship-based system facilitates Government intervention, making it both less costly and less transparent. Which system is preferable, though, depends crucially on the environment. Data marshalled to substantiate the differentiation between national models certainly paint a striking picture of financialsystemic variance. According to Rajan and Zingales (2003: 6), bank deposits, relative to gross domestic product (GDP), were some 60 percent higher in continental Europe than in the United Kingdom and United States in 1980, while the quantum of bank credit (against the same denominator) was nearly 100 percent greater; conversely, equity markets, again measured relative to the value of national economic output, were only a fifth as large. Vitols (2001: 172) paints a broadly comparable picture for the mid1990s, comparing, in his case, Japan, Germany and the United States. While banking system assets represented an estimated 64 and 74 percent of total financial system assets in the two former countries respectively, they accounted for only 25 percent in the United States; meanwhile, where 61 percent of nonfinancial corporations’ financial liabilities were (already) securitized in the case of the United States, the comparative figures for Japan and Germany were just 15 and 21 percent respectively. A marked differentiation between the United States and United Kingdom on the one hand and Japan, Germany and the rest of continental Europe on the other, then, is central to the traditional rendering of bank- versus market-based systems. This rendering, however, has an important temporal as well as spatial dimension. Specifically, in regard to continental Europe (including Germany) in particular, it is generally claimed that the financial system has been becoming more market-based – and, hence, less bank-based – over time. Rajan and Zingales (2003), for instance, relate exactly this narrative. If, as recently as the beginning of the 1980s, continental Europe had represented a clear example of a bank-based approach, things have since changed, and by the turn of the millennium markets had become considerably more material. Once more, data (pp. 8–9) are put to work to prove the point. During the two decades beginning in 1980, the cumulative capitalization of the region’s equity markets relative to economic output levels increased more than thirteenfold; the outstanding value of deriva- tive contracts, meantime, increased from a paltry $2.7 billion in 1986 to $2.4 trillion in 2001. Finally, before we turn, in the next section, to existing critiques of the stark conceptual differentiation between bank- and marketbased models, one last aspect of this differentiation needs fleshing out. In many ways it is the most important aspect, but it is also the most difficult to distill because it is seldom made explicit. This is the nature of the difference between the phenomena that actually embody the respective system types: namely, banks and markets themselves. Typically, the nature of this underlying difference is simply taken for granted when financial systems ostensibly distinguished by cleaving to the one phenomenon or the other are being discussed. Where scholars of bank- and market-based financial systems do delineate their understandings of the key differences between banks and markets, they generally emphasize in the first instance the issue of price signaling. This is particularly the case in the mainstream finance literature. Because they are deemed to be effective – indeed, unrivalled – processors of information, markets efficiently convey price signals to market participants and hence efficiently guide investment decisions. In a bank- or relationshipbased system, by contrast, ‘‘there are really no price signals,” write Rajan and Zingales (2003: 12), ‘‘to guide decisions.” But price signaling, for all its importance as a mark of differentiation, is not regarded as the fundamental source of differentiation. This is seen to relate instead to the underlying dynamic that facilitates efficient information conveyance – a dynamic that markets foster but relationship-based systems do not: competition. There are ‘‘really no” price signals in bank-based systems because, ultimately, of an ‘‘absence of competition” (Rajan and Zingales, 2003: 12). Or, as Boot and Thakor (1997: 695; emphasis added) put it in their own comparison of financial system architectures: ‘‘agents within a bank can cooperate and coordinate their actions, whereas agents in a market compete.” Agents can ‘‘be anonymous in a market but not in institutions”; beyond this distinction, the same authors stress, ‘‘we assume nothing more about what banks and markets do.” We will return to the importance of these foundational assumptions of competition and anonymity in due course. 3. Bridging the Manichean divide? Few stylized models introduced to provide simplified representations of reality remain unchallenged. The model described in the previous section is, in this respect, no different. Thus, if, in the final decades of the twentieth century, the model was mobilized largely positively – to anchor proliferating discussions of actual financial systems in a common conceptual framework that promised to provide a powerful means of classification, even explanation – then the past decade-and-a-half has witnessed increased questioning of its potency and precision. A first area of concern has been with the metrics used to assess different countries’ financial-systemic qualities. Is the relative scale of bank balance sheets, for instance, necessarily the best or even a reasonable way to determine the relative degree of approximation of a national financial system to the bank-based type? As Erturk and Solari (2007: 373) observe, ‘‘different measures give divergent results and many measures are contestable.” Taking the specific case of Germany, they note that different researchers using different measures have come to very different conclusions about the nature of its financial system. The second main line of criticism of the model has consisted of pointing out that, entirely unsurprisingly, no country quite ‘‘fits” either of the ideal-type stylizations contained in the basic model. Thus, Allen et al. (2004: 492) label as ‘‘rather simplistic” the ‘‘conventional wisdom” according to which Japan and continental Eur- B. Christophers / Geoforum 66 (2015) 85–93 ope are lumped together in one category with the United States and United Kingdom in the other. The closest to a genuine fit is, they suggest, the United States – comfortably ‘‘the most marketbased” of all the countries they examine. Beyond the United States, however, things are considerably muddier, with most countries characterized by a mix of the two types of financial system rather than by one or the other – a finding, for continental Europe, very much in line with Rajan and Zingales’ abovementioned observation concerning markets historically encroaching on traditional bankbased systems. Indeed, not only has the rise of financial markets largely put paid to the idea of bank-only systems. But, equally, even where such progressive disintermediation has been pronounced, some intermediaries inevitably remain (French and Leyshon, 2004: 282). As Sawyer (2014) argues, a market-based system – even the United States’ – ultimately has to include banks, as issuers of credit money if nothing else. The inevitable mixing of system ‘‘types” within individual territories therefore raises the obvious question of ‘‘how to classify ambiguous and intermediate national cases” (Erturk and Solari, 2007: 373). Allen et al’s (2004: 492) answer is to describe Japan, for example, as ‘‘very much a bank- and market-based” system, while suggesting that it may also be appropriate to characterize the U.K. system – ‘‘with a large stock market and bank loans but a small bond market” – in the same hybrid terms. The other principal criticisms of the simple dualistic model question not the relative levels of bank-ness and market-ness in different financial systems, so much as the relationship between banks and markets and bank- and market-based financing within those systems. The conventional view, Song and Thakor (2010) observe, is that the two different approaches to financing compete with one another in more-or-less zero-sum terms: in other words, a relative increase in market-based financing implies a commensurate decline in bank-based financing. But this, the same authors say, is defied by the evidence. While competition between banks and markets certainly exists, growth in bank-based financing can stimulate financial markets rather than the opposite. How so? Hardie et al. (2013) provide one important answer. Banks, they note, even in nominally non-market systems, increasingly finance themselves in the financial markets, to the extent that ‘‘reliance on market-based funding is now generally the case in bank lending” (p. 700). If banks grow their lending business, in other words, the markets benefit in kind. Hardie and Howarth (2013) advance the concept of ‘‘market-based banking” to capture this important symbiotic dynamic. Indeed, such developments in banks’ self-financing are key to Hardie et al’s (2013) own critique of the ‘‘false dichotomy” between market- and bank-based financial systems. This dichotomy, they submit, rests on a critical assumption: that ‘‘banks in certain countries possess the ‘financial power’ that enables them to mitigate the impact of financial market pressures on nonfinancial companies (NFCs) with which they have had a long-term relationship” (p. 691). (Those ‘‘certain countries” being the likes of Germany and Japan.) But this assumption no longer holds. Why? Precisely because of the aforementioned changes in banks’ funding sources. Banks are seen to have lost ‘‘financial power” because the latter was predicated on the solidity of deposit-based funding and the presumed loyalty of depositors; ‘‘where banks are themselves dependent on the market for their financing, they are unable to perform the role of bulwarks against market pressures that is assigned to them by the concept of a bank-based system. Instead of patiently acting as a bulwark, banks transmit those pressures to their NFC customers, just as a financial market intermediary would do in bond or equity markets” (p. 708). If, pace Hardie et al., the ability of banks to mitigate market pressures distinguishes bank-based financial systems from market-based ones, 89 disintegration of that ability entails disintegration of the conceptual dichotomy arising from it. Both Hardie et al. (2013) and Song and Thakor (2010), then, productively problematize the relationship between banks and markets that is presumed by the dualism of bank- and market-based financial systems. Other notable recent critiques of that dualism (e.g. Adrian and Shin, 2010) do likewise. But, none of these accounts problematizes the distinction between banks and markets that is also presumed by the conventional classificatory model. In all of the critiques discussed in this section, as in the model itself, there are banks, on the one hand, and there are financial markets, on the other, even – or perhaps especially – when the two cross paths. Indeed, only if banks and markets are figured as belonging to different ontological registers is it possible to figure their ‘‘relation” in the first place. The effect of arguing over whether banks are ‘‘more” or ‘‘less” central to or embedded in contemporary financial market structures and dynamics – Rajan (2006: 526), for instance, submitting that the banking system is ‘‘the lever by which the entire financial system is controlled” – is to further reinforce a seemingly categorical (ontological) distinction between markets, where financial assets and liabilities circulate, and participants in markets. It is to retain ‘‘the misleading implication that banks stand in contrast to markets” (Sawyer, 2014: 18). The next section shows that they do not. 4. Financial markets as concentrated institutional interaction This final section offers a very different figuring of financial markets from those encountered thus far. But to get there we need to start with the generic concept of a market itself. What is a market, at least as the flourishing social-scientific literature on markets has come to define it? Aspers (2011: 4), generalizing from this literature, identifies a market as ‘‘a social structure for the exchange of rights in which offers are evaluated and priced, and compete with one another.” This is a useful framing. For one thing, it emphasizes the inherent sociality of markets. For another, it emphasizes that what markets are for is exchange (of rights over whatever object it is that those rights attach to). Moreover, Aspers’ definition signals that markets constitute a special modality of exchange; as Karatani (2014), among others, has shown, exchange can and historically has assumed numerous different modes of realization. Market exchange is characterized by two critical characteristics, both also mentioned by Aspers: it involves price formation; and it is, at least in theory, competitive. If this is what markets are for, what, meanwhile, are their core, common components? Two components are essential for markets to exist. The first is the thing or things being exchanged; is this a market, for instance, for cars, human organs or, closer to our own concerns, corporate bonds? The second essential component is the parties to the transaction: the buyer and the seller. And one could, conceivably, add a third component, namely market ‘‘infrastructure,” such as exchange platforms, regulations and norms (Knorr Cetina, 2012: 123–126). Hence the assertion by three international financial supervisory bodies that a financial market ‘‘is the combination of traded instruments, transacting counterparties (market participants) and the trading infrastructure that includes rules, conventions, settlement processes and information” (IMF/ BIS/FSB, 2009: 10). But, this third component is arguably contingent rather than critical. Markets – perhaps even rudimentary financial markets – can exist without such infrastructure, although they may not be particularly orderly markets in such circumstances. In any event, it follows from this that markets are clearly not best conceived as ‘‘places” where economic agents can trade, and from which such agents can simply exempt themselves and 90 B. Christophers / Geoforum 66 (2015) 85–93 nonetheless leave the market intact. Markets surely are, in significant measure, those agents, or at least the practice and product of their price-establishing interaction. If, after all, those agents decide not to undertake exchange, there is no market – as, in the case for example of housing markets, regions such as much of southern Spain perfectly illustrated in the years immediately following the financial crisis: there may have been plenty of houses nominally for sale, but in many areas there was no ‘‘market” simply because there were no buyers. Buyers and sellers do not just meet in markets but help constitute them, and thus, as the aforementioned financial supervisory bodies observed, ‘‘the systemic importance of a market derives to a certain extent from the systemic importance of the institutions that participate and use this market” (IMF/BIS/FSB, 2009: 10). Substitute the word ‘‘certain” for ‘‘significant” and that, in a nutshell, is this article’s central claim in regard to financial markets. This claim, however, is not only that financial markets are, in large part, banks and other financial institutions and their interaction. It is, further, that this interaction generally assumes a highly – and in many cases, increasingly – concentrated form. Representing the decidedly concentrated and indeed often coordinated interaction of small numbers of identifiable institutions, the reality of today’s financial markets gives the lie to the assumptions of anonymity and competition embedded in conventional renderings of both markets per se and those markets’ distinction from banks. To develop this argument about the nature of today’s financial markets, it is necessary to anchor the discussion in their empirical diversity. Five main types of such markets are typically recognized. Since these markets, and the nature of the institutional interaction at their core, vary widely, it is necessary to consider them separately before attempting to draw conclusions at a more generalized level. The five main market types are: capital (equity and bond) markets; commodity markets; derivatives markets; foreign exchange (currency) markets; and money markets. While the markets are usually distinguished from one another in this way, however, it is important to note that they link and overlap. For what follows, perhaps the most important overlap to be aware of is that between commodity and derivatives markets. Specifically, derivatives, and futures contracts in particular, have become over time primary vehicles for investing in commodities, secured as they are by the underlying physical asset. Indeed, it is arguably by virtue mainly of this securitization that commodity markets can properly be considered as financial markets, although the fact that financial institutions trade and make markets in physical commodities per se, as well as in derivatives thereof, is also seen to justify this categorization. That the interaction that constitutes financial markets is bankdominated, highly concentrated, and often (on both counts) increasingly so, is especially clear of the money, currency and (financial) derivatives markets. These can therefore be dealt with in relatively short order, beginning with the money markets. The property to which the rights circulating in these markets attach is not cash but low-risk, highly liquid, short-term IOUs (i.e. debts). Such markets are wholesale as opposed to retail markets, and thus specifically support large institutions, by very definition. ‘‘Trades are big,” the leading industry handbook (Stigum and Crescenzi, 2007: 4) observes, ‘‘and the people who make them are almost always dealing for the account of some substantial institution.” More precisely, these are primarily interbank markets, consisting of banks lending to and borrowing from each other: in the U.S. case, for example, the money market’s core is ‘‘the interbank federal funds market, where financial institutions borrow and lend balances that they hold at the Federal Reserve” (Goodfriend, 2011: 120). The money markets arguably therefore represent the concentrated, bank-interactional financial-market-form par excellence; and the recent LIBOR and EURIBOR scandals, which were explicitly money-market phenomena and saw major international banks colluding to form interest-rate-manipulation cartels (Ashton and Christophers, 2015), shone a particularly bright light on this characteristic. Not far behind, however, are the foreign exchange or currency markets, which can be distinguished from the money markets by virtue of the fact that they effect not the lending and borrowing of individual currencies but the exchange of currency pairs, and which therefore determine the relative values of different currencies under a floating exchange rate system. Trading activity in these markets, too, has long been dominated by major international banks; and such domination is increasing. In a recent survey, the Bank for International Settlements (2013: 12) estimated that the proportion of global foreign exchange market turnover involving a non-financial institution as a counterparty had halved from 17.4 percent in 1998 to just 8.7 percent in 2013. Even more striking, however, is the degree of concentration of market turnover in a small number of institutional hands. ‘‘In spite of its size,” a study by Financial Times journalists (Schäfer et al., 2013) concluded, ‘‘the foreign exchange market is run by a small group of global traders. One corner of foreign exchange – the $2tn spot market – is controlled by a group of fewer than 100 individual traders at a handful of large banks. . . . The largest four banks in foreign exchange – Deutsche Bank, Citigroup, Barclays and UBS – have amassed more than half the overall market share, up from less than 20 per cent 15 years ago.” And, as with the money markets, the forex markets have also been rocked in the post-crisis years by investigations surfacing the type of impactful collusion – in this case, to manipulate spot exchange rate benchmarks – that ultimately is only feasible in highly concentrated markets (Corkery and Protess, 2015). Third and last among those markets where concentrated bank dominance is manifest are the financial derivatives markets (commodity derivatives will be considered separately, below). Financial derivatives are instruments – principally forwards, options and swaps – where the underlying asset is itself of a financial nature, such as equities, bonds, currencies or interest rates. To understand the structure of financial derivatives markets it is especially important to get a handle on the structure of markets for ‘‘over the counter” (OTC) derivatives, which do not trade on formal exchanges (Dodd, 2002; Knorr Cetina, 2012, pp. 123–126), since such markets dwarf in size those for exchange-traded instruments – the Bank for International Settlements estimating the cumulative amounts outstanding at $708.0 trillion and $64.6 trillion, respectively, for the end of 2013.1 And, where OTC derivatives in particular are concerned, we find the same pattern as for money and currency markets. Notes Dombret (2013): ‘‘the OTC derivative contracts that are traded around the world have led to a network in which a very small number of globally active banks play a major role. In the sub-market for credit default swaps, for example, the ten most important market participants are involved in more than 70% of all transactions” (c.f. Battiston et al., 2013). The reverse side of the same coin is the infinitesimal market share of retail investors – estimated at below one percent of amounts outstanding, for example, for equity derivatives (Deutsche Börse, 2008: 6). Financial derivatives markets, in short, are largely markets for and of large financial institutions; derivatives, observes Lindo (2013: 11) in an important study of such dominance, are, today, ‘‘a banking activity.” Traditional representations of capital (especially equity) markets, by contrast, suggest a very different set of structural configurations and interactional dynamics. Especially, though not only, in the United States, capital markets are widely seen as having 1 See http://www.bis.org/statistics/dt1920a.pdf (deducting $2.2 trillion in commodity contracts from the $710.2 trillion total) and http://www.bis.org/statistics/r_ qa1403_hanx23a.pdf. B. Christophers / Geoforum 66 (2015) 85–93 become the quintessentially anonymous and competitive markets of conventional figuration, home to a myriad retail household investors no less than to financial institutions of all stripes and sizes. Duca (2001) evocatively captured the tenor of this wider discourse in writing in celebratory terms of the ‘‘democratization” of America’s capital markets. Yet, research undertaken over the past decade has gone a considerable way to demonstrating that this rather idealized picturing of capital markets bears little comparison to those markets as they are produced and reproduced on a daily, material basis. Consider equity markets, the prototypically democratized markets in the traditional rendering. Progressing the recognition by the likes of Allen et al. (2004) that for all its status as the world’s ‘‘most market-based” economy, the United States features financial markets in which ‘‘the majority of financial assets are held in intermediaries” (p. 494), Davis (2008) demonstrated that America’s putative financial democracy is a ‘‘representative” rather than ‘‘direct” one. ‘‘Since the mid-1990s,” his research specifically showed, ‘‘small handfuls of mutual funds – not public or private pension funds – have become the most significant large-scale corporate owners. . . . As a group, mutual funds hold almost 30% of U.S. corporate ownership today, compared with 8% in 1990. Moreover, the industry’s assets are highly concentrated in a few institutions.” Davis styled this development ‘‘a concentration of corporate ownership in a few hands not seen since the early days of finance capitalism” (p. 12). So much, at any rate, for democratization. More recent research has put further striking numbers on this concentration, the Office of Financial Research (2013: 3) – using data from Morningstar Direct – reporting that at the end of 2012 the top five mutual fund groups managed 48 percent of U.S. equity mutual fund assets; and showing, too (p. 6), that many of the leading U.S. mutual fund groups, like many leading (and increasingly influential) hedge fund managers, are owned by banks. Retraining our lens from the United States to the global scale, furthermore, we find the same patterns writ large. Particularly significant in this regard has been the innovative research into networks of (equity-based) control of transnational corporations carried out by Vitali et al. (2011). This concluded that nearly 40 percent of the control over global corporations ‘‘is held, via a complicated web of ownership relations, by a group of 147 transnational corporations in the core” (p. 4). More pointedly for our purposes, of this small group – labeled ‘‘an economic ‘super-entity’” by the authors – some three-quarters were found to be financial institutions. The picture for bond markets, which may lack the public visibility of equity markets but which, comprising state as well as corporate debt, are substantially larger, is in some respects broadly comparable. Indeed, the mutual fund data relating to U.S. markets are almost identical: the top five funds manage 53 percent of fixedincome funds, compared to the 48 percent figure cited above for equities (Office of Financial Research, 2013: 3). Yet, there is one significant and crucial difference between the two, relating to the increasingly pivotal role of central – as opposed to private – banks in bond markets. Allen et al. (2004: 498) discussed this development already a decade ago, estimating that Asian central banks, the most active investors, held up to $700 billion of U.S. Treasury securities. But with recent and ongoing post-crisis liquidity injections in several major markets occurring in large part through the so-called ‘‘quantitative easing” of fixed-income asset purchases (major buyers have included the U.S. Fed, the Bank of England, the Bank of Japan and the European Central Bank), central banks have come to assume a hitherto unprecedented significance. Describing these investors, not insignificantly, as ‘‘insensitive to prices and fundamentals when purchasing,” a representative of BNP Paribas (Craig, 2014) recently reported that they had become ‘‘the most important players in each of the world’s four largest bond markets.” Not for nothing, in observing these developments, have some 91 commentators been moved to speculate that ‘‘financialized capitalism” in general is being supplanted by an even more narrowlyconfigured ‘‘central bank-led capitalism” (Bowman et al., 2013). Bond markets, in any event, can still be figured in substantial measure in terms of banks and their interactions – only not, in this particular case, banks as we are perhaps most accustomed to picturing them. Only commodity and commodity derivatives markets ultimately appear to present a substantively different picture to the one painted above for markets in capital, money, currency and (financial) derivatives. Here, to be sure, just as in the aforementioned markets, banks and other financial institutions had until relatively recently represented a strong and concentrated presence: having long provided financing to commodity traders and producers, the deregulatory 1980s and 1990s saw banks aggressively and successfully expand their commodity market operations, becoming, as Brown and Hug (2013: 42–43) note, ‘‘major players in the expanding markets for crude oil and other commodities, using proprietary trading strategies which had been developed in the foreign exchange, money and interest rate markets.” But, the same authors continue, ‘‘much of this financial edifice has been torn down” since the financial crisis struck, with some banks closing their commodities businesses altogether and others pulling out of trading and ‘‘returning to their roots as hedgers of risk and financiers of trade and investment projects.” Davis (2014) relates a similar narrative, specifically for Asia, citing Morgan Stanley’s recent decision to sell its oil trading unit and Deutsche Bank’s decision to exit ‘‘most” of its commodity business. And yet even in the case of commodity derivatives, according to Davis, where the presence of financial institutions has most notably thinned out and oil majors, in particular, are forcefully re-establishing themselves, the share of (Asian) trade represented by non-financial firms is a mere 11 percent – more, pointedly, than for ‘‘any other [financial] asset class.” To figure financial markets, as we have done, in terms primarily of the concentrated, price-establishing interaction of major financial institutions, is, however, to overlook one extremely important dimension of those markets’ plumbing. Because, one or more intermediary is frequently present specifically to facilitate and lubricate the coming-together and transactional turnover of buyers and sellers that is such financial-market exchange. This is the role of the so-called dealer or ‘‘market maker”: the intermediary who (often literally) makes markets in certain financial assets by offering both buy and sell prices, generating profits on the spread between them. This intermediary’s role is essentially to provide liquidity – to ensure that willing buyers and willing sellers can, respectively, buy and sell – especially where it is otherwise in short supply. Market makers perform a vital function, and hence it is not possible to offer a credible, alternative, institutionally-oriented figuring of financial markets without factoring this function in. For our purposes, two features of the world of market-making are particularly salient; and, significantly, they precisely mirror the primary characteristics, already delineated, of the world of the markets thus made. That is to say: market-making is, firstly, also dominated by banks; and secondly, it is also a decidedly concentrated and hierarchical affair. Big banks control the scene, and their dominance is widely strengthening. Sometimes this dominance is largely preordained, as on the New York Stock Exchange (NYSE), where Designated Market Makers, previously referred to as ‘‘specialists,” are granted official market-making franchises for given securities. The leading such NYSE specialists are investment banks, and while they are not the only liquidity providers (they compete with floor brokers and, sometimes, Supplemental Liquidity Providers), they play a pivotal role (e.g. Madhavan and Sofianos, 1998). In other instances, dominance emerges in a nominally competitive situation. One such is the NASDAQ equity market. In a highly 92 B. Christophers / Geoforum 66 (2015) 85–93 influential study, Christie and Schultz (1994) analyzed the distribution of bid-ask spreads and, finding anomalous patterns, concluded that ‘‘the structure of the NASDAQ market may permit tacit collusion among its dealers” (p. 1816). Ellis et al. (2002) subsequently found that while the NASDAQ theoretically features ‘‘the price-setting competition of multiple market makers” insofar as it allows for free dealer entry and exit, in reality ‘‘free entry does little to improve the competitive nature of the market” and thus even if market-making is not quite ‘‘monopolistic” it is markedly ‘‘concentrated” (pp. 2290–2291). Meanwhile, more recent research has usefully documented comparable concentration in derivatives market-making – the number of firms serving the market falling from 30 (forward rate contracts) and 14 (options) to 14 and 10 (respectively) between 1998 and 2010 in the case of currency derivatives (OECD, 2011: 43), while market-making in credit default swaps is ‘‘very concentrated, with about 10 bank-dealers responsible for about 90 percent of trading volumes” (Kiff et al., 2009: 6–7), and with fewer than 10 dealers now serving core equity derivatives markets (OECD, 2011: 47). In sum, it is increasingly clear that neither financial markets per se nor the market in and for making such markets approximates in any meaningful shape or form to the idea of the financial market as traditionally formulated, wherein agents are dispersed, competitive and anonymous. The prominent and concentrated role of banks not so much ‘‘in” but as markets fundamentally belies the concept of a market-based financial system defined through its very distinction – operationally and ontologically – from a bankbased system. If, as adherents to the classical dualistic model often suggest, banks are ‘‘being disintermediated in favor of market-based sources of financing” (Hardie et al., 2013: 703), one would after all expect to see the level of bank assets decreasing relative both to the size of the economy and to the size of capital markets. Yet Hardie at al (Hardie et al., 2013: 703) find that in countries as varied as France, Germany, the Netherlands, the United Kingdom and the United States, the very opposite, since the turn of the millennium, has been the case. All these national financial systems, in other words, irrespective of the depth and breadth of their financial markets, have become ‘‘more bank based.” A central tenet of this article is that this is in fact entirely consistent, not contradictory, with constant or even deepening levels of ‘‘marketization.” Registering the mutual co-constitution binding markets with financial intermediaries such as banks is crucial for various obvious tangible reasons. As French and Leyshon (2004: 282) write: ‘‘It may suit the dominant market discourse not to acknowledge these intermediaries, and it is also possible that many of these new calculatory actors and agents will bear little resemblance to the traditional insurance company, bank or mortgage broker, but this does not mean that the risks and problems of financial co-ordination can simply be ignored or written off.” If ever renewed evidence of such risks and problems were required, the financial crisis clearly provided it. But, deconstructing the duality of banks and markets – and bank- and market-based systems – is important for less directly tangible reasons, too. Markets are political-economic realities; but they are also ideas. And, like many other prevalent economic ideas, markets as ideas have effects – the idea of financial markets perhaps especially so. This particular idea – ‘‘financial markets” or, more generically, ‘‘the market” – is put forcefully to work in public policy and political discourse in the service of the rationalization and justification (or, of course, the refusal) of all manner of contemporary political projects. Such a reified (and deified) ‘‘market”, like the market of the dualistic scholarly model, similarly abstracts from and thus effaces banks and other relevant financial institutions: it is the market, not the flesh-and-blood institutions that largely constitute it, that passes judgement on policy. The scholarly model may circulate in a separate discursive sphere from the ‘‘market” of policy discourse. But, even if only distantly and indirectly, it lends it academic credence. In concluding, therefore, this article recommends resisting the lens and language of markets, to the extent that we are meaningfully able, when discussing finance and its political economy. It does so for two reasons. The first is strictly scholarly: insofar as it hides or even actively denies the systemic power of large financial institutions in general and banks in particular (which it very often does), the market metaphor – positing instead the qualities of dispersion, anonymity and competition – is imprecise and misleading. The second, meanwhile, is of a more political nature. The more we talk about and normalize markets and the idea thereof, the more we potentially give fuel to their self-evident reification in political discourse. Instead, we should be encouraging a more accurate and ultimately honest political discourse – one which acknowledges the institutional power in question and, where necessary, rationalizes policy choices accordingly. 5. Conclusion The object of this article’s critique has been a well-established scholarly model of economic organization that posits a fundamental difference between ‘‘bank-based” national financial systems, on the one hand, and ‘‘market-based” systems on the other, and that hypothesizes a generalized contemporary trend toward marketbased systems as banks – finance’s classic intermediaries – become disintermediated. Markets, this model intimates, increasingly constitute the means by which finance is today organized. Yet this way of figuring of finance, we have seen, conceals much about the structure and dynamics of the financial world. In fact, as well as concealing, it actively distorts. This is not because financial markets are not increasingly pervasive. They plainly are. Rather, the distortion derives from the fact that the model in question suggests mutual exclusivity between banks and financial markets – more markets equals less banks – according to their presumed ontological differentiation. Such differentiation and exclusivity, however, have been shown to represent false premises. Indeed, as financial systems become more market-based they often also become more bank-based. That this is the case is explained by a critical but seldom acknowledged political-economic reality: financial markets are, in large part, banks and their interaction. Acknowledgements Thanks to three anonymous referees for helpful criticisms and suggestions. The usual disclaimers apply. References Adrian, T., Shin, H-S., 2010. The Changing Nature of Financial Intermediation and the Financial Crisis of 2007–09. Federal Reserve Bank of New York Staff Report No. 439. <http://www.newyorkfed.org/research/staff_reports/sr439.pdf>. Allen, F., Gale, D., 1997. 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