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The sources of financial profit: A theoretical and empirical investigation of the transformation of banking in the US
Abstract
The last thirty years in the US have been characterized by rising financial profits as a share of total profits and the growth of banking activities yielding non-interest income. These developments pose two questions. First, what are the social relations enabling and sustaining financial profits and what are their macroeconomic sources? Second, what do these trends imply for the nature of banking and what kind of theory of banking can capture them? This study addresses these questions and makes four contributions. First, a Marxist theory of banking is developed to capture the transformation of banking drawing on two characteristics: first, emphasis on liquidity provision through exchange of promises to pay among credit participants and, second, explicit connection between bank revenues and macroeconomic aggregates (wages, profits, assets). It is shown that a Marxist theory of banking can be a more general theory of banking retaining strengths of other approaches and overcoming their limitations. Second, it is shown that the corporate form of business organization and the attendant capital markets create opportunities to extract a range of profits with similar characteristics, i.e., capital gain-like revenues. The key features of their simplest form—founder’s profit—are shown also to hold for securitization revenues and, partly, for profit from mergers and acquisitions. These revenues hinge on wealth transfers across the society and, therefore, differ from profits from production. Third, by bringing together the Marxist theory of banking and the analysis of capital gain-like revenues, liquidity provision is shown to form the basis for banks’ sharing in capital gain-like income. The core functions of banking can, therefore, co-exist with, and even form the basis, for a significant transformation of bank revenues. Examination of the multiplicity of forms of capital gain-like revenues shows that their extraction is the common driving force behind the apparently heterogeneous activities associated with the transformation of banking. Fourth, empirical analysis of the US bank holding companies confirms that capital gain-like revenues were a significant part of bank revenues in 2001–2010. Given the rising household vulnerability toward wealth transfers, this trend suggests a reinstatement of predatory aspects of finance in contemporary capitalism.
Subject Area
Economics|Economic theory|Banking
Recommended Citation
Levina, Iren G, "The sources of financial profit: A theoretical and empirical investigation of the transformation of banking in the US" (2012). Doctoral Dissertations Available from Proquest. AAI3545959.
https://scholarworks.umass.edu/dissertations/AAI3545959