financialization

Financialization is a process by which financial motives, financial markets, financial actors, and financial institutions gain increasing influence over economic policy and outcomes. It encompasses expansion of the financial sector relative to the real economy, greater use of debt, securitization, and the valuation of assets beyond their productive use. As finance accounts for a larger share of profits, employment, and capital allocation, nonfinancial firms may optimize strategies around shareholder value, while households increase leverage and participate more in asset markets.

It has been driven by deregulation and liberalization of financial markets, globalization, technological advances, and the persistence of low or volatile interest rates after the 1980s. The growth of investment funds, private equity, derivatives, and complex risk management tools has expanded the scope and speed of financial intermediation.

The consequences are contested. Proponents cite improved liquidity, efficient price discovery, risk-sharing, and the mobilization of savings for investment. Critics point to higher income and wealth inequality, greater sensitivity of the real economy to financial shocks, and a shift in corporate governance toward short-term share price performance. The financial sector’s size and the share of profits can distort investment away from productive, long-term activity. Studied indicators include the share of finance in GDP, private sector debt levels, and the composition of national income.

Policy responses include macroprudential regulation, tighter bank capital requirements, and reforms of corporate governance. Examples of reform efforts are Basel III, Dodd-Frank in the United States, and similar measures in other countries aimed at reducing systemic risk while preserving liquidity and credit creation. Debates continue about the optimal balance between financial innovation and real-economy investment.