Understanding financialisation

Aashna Agarwal (GH): Digitalisation in the past has led to financialisation and the 2008 financial crisis. The world is still reeling from it. Countries like India are digitising but are being careful not to financialise. What products and metrics should we be looking at to keep out system steady?

Claude Lopez (CL): First, financialisation, I believe, is by technology and digitalisation was a part of it. On the one hand, it is a good part as it adds transparency. On the other hand, it was slightly threatening because the speed of transaction increased, and maybe, regulators were not very aware of what the new game was. So in terms of regulations, every country in the ever evolving world that we are in should consider having a better understanding of what is going on. This means there need to be more interactions and roundtables by the private sector, especially by the ones who are driving these innovations.

It seems that innovation in the financial sector does not come from finance, it comes from technology. And we are those actors: being a part of those discussions regarding how to regulate these instruments of tomorrow seems to be key.

A side effect of digitalisation also is the fact that it has increased transparency: so it should help you ask for proper disclosure and gain a better understanding of who the players are. Then for any regulator, it’s easier to understand if there is any type of corruption taking place. The goal is to make sure the market works efficiently. For this to happen, a regulator needs to make sure everyone is behaving in a proper manner.

GH: Can you elaborate on what technologies lead to more financialisation?

CL: Just the fact that most of the trade now is done, using technology and not in manual ways or by individuals, automatically speeds up the process. So if you are a regulator and you do not have the right to understand or process the new amount of transactions happening, then it is an issue. There will be a time difference — between the issue happening and realising it is (happening). It’s very much to do with the ability to understand where you are now. During the crisis, maybe initially, there was a lag between the actions of the Feds and the failure of Lehman Brothers. So technology, if both sides have it — that is, both the actors in the financial market and also regulators — that will allow you to make a decision as a regulator in a timely manner. This is very much what you want to do as a good regulator; at least, have a better understanding of what is going on.

GH: Looking out into the future how can new financial innovations be used toward the real economy?

CL: The standard business model of most of the economy running on banks means that automatically, part of the real economy is not being serviced and there is limited capital access, especially now. The banking system is less willing to take risks. With technologies in place, you have alternative products, something we tend to testify as non-banking activities: this is, automatically, shadow banking. It provides alternative instruments, and so, all products raise capital for different types of companies or individuals. And, of course, technology consists of key parts of things — from peer-to-peer lending to other more fancy instruments in the financial world.

GH: India has taken a number of steps to ensure financial inclusion. Are they adequate? What more can our central bank, financial ministries and businesses do?

CL: India is a big country, so it is a work-in-progress, but in the right direction. There is really a desire to strike a balance. They are trying to have financial inclusion, and I have noticed that the technology for this is very good in India because there is the biometric process: every individual has an identity independent of where they are living. This is the very first step to achieve this kind of financial integration.

But once you do have that information, what do you do with it? There is something that I think the United States is doing — and if I were to suggest to any central banker or regulator to do this too… The The U.S. Commodity Futures Trading Commission is planning to have more labs, with different participants and social innovators, but also financiers, to understand better where the market is going. Any economy that is moving away from funding only based on banks needs to acquire that knowledge. And so, making sure that regulators understand what is happening in the market today and what will happen tomorrow is key. Being able to identify the key stakeholders of the future is key – so that whenever the changes appear, thereafter the regulators are not fazed and not always running after something. So that also means that regulators need to go beyond just discussing among themselves: they should include all the stakeholders in the discussion.

Claude Lopez is Director, International Finance and Macroeconomics Research, Milken Institute

Aashna Agarwal is Content Coordinator at Gateway House.

This interview was exclusively conducted for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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