I’ve been trying to follow a nagging thought through to its conclusion. We know to expect that flooding risk will extend to an ever increasing proportion of the UK housing stock. But in the context of financialisation, mortgages underpin bank lending, and by extension the wider financial system. And a majority of households depend on their house as a savings vehicle. So what happens when physical climate impacts destroy the real assets that households and the financial system are relying upon?
This is part 2. Using debt to drive growth.
From the 1970s until the global financial crisis of 2007-8, the financial sector grew in size, revenue and sophistication. The effects were felt by all businesses and households, and there were major consequences for economic policy and the political system. This process is described by the term ‘financialisation’.
Initially this term described how the corporate governance priorities of large firms prioritised profit-making through equity markets (stock price) rather than product market competition (price of goods and services). The corporate governance strategies of large firms changed from ‘accumulate and reinvest’ to ‘downsize and distribute’, which meant routine cuts to labour costs, including wages and pensions, or selling off or closing down whole divisions to realise short-term profits that amplified stock market performance (Lazonick and O’Sullivan, 2000).
This shift was replicated more broadly, as growth across the economy was fuelled by financial rather than productive activities. The ultimate outcome of financialisation is the balance of the economy we have now. The assets of British banks are around £7 trillion – four times the aggregate of the yearly income of everyone in the country. Their liabilities are a similar amount, and are mainly obligations to other financial institutions. Meanwhile, lending to firms and individuals engaged in the production of goods and services – the imagined role of banks in most people’s minds – amounts to about 3% of that total. In other words the ‘originate and distribute’ business model of banks is skewed towards ‘distribute’ and the growth of the trade of securities, which is the main explanation of the growth of the finance sector. I recommend John Kay’s short parable of the ox for illustrative purposes.
What has driven financialisation?
Financialisation was driven by the reduction of profit-making opportunities for banks from lending to large corporations on the one hand, and institutional and legal support for other routes to profitability on the other.
The traditional banking model of the post-war era, where banks served as primary intermediaries between savers and corporate borrowers, underwent a fundamental transformation in the 1980s and 1990s. This change was driven by financial deregulation and the growth of open markets, which gave large corporations direct access to financial markets and provided individual savers with diverse investment options beyond bank deposits. Banks lost their privileged position as both deposit-takers and corporate lenders, while multinational corporations became increasingly ‘financialised’ – engaging in financial activities and transactions as a significant source of their profits rather than relying purely on productive operations.
This shift coincided with (and contributed to) a period of mediocre productivity growth and weak performance in the productive sector. Rather than achieving profitability through technological advancement and genuine productivity improvements, businesses maintained profit margins primarily by suppressing real wage growth and intensifying labor exploitation. This approach meant that companies could capture the limited productivity gains that did occur, but it departed from the more sustainable historical pattern where technological progress and real productivity improvements drove economic growth.
In response to declining corporate lending opportunities, financial institutions underwent a strategic transformation supported by institutional and legal changes. Banks pivoted in two major directions: first, they turned toward individual consumers as a primary source of profit, focusing on both lending (through mortgages and consumer loans) and asset management (through pensions and insurance products). Second, they adopted investment banking practices, generating income through fees, commissions, and proprietary trading.
In a context of stagnant real wages, lending toward individual consumers meant the insertion of the financial system into the process of consumption. Financial products supporting individual consumption is effectively a postponement of payment, allowing commodities to be consumed by discounting future wage earnings. This is a form of financialisation: the involvement of the financial system in consumption created a trend of profits being increasingly extracted from the wages and salaries of individuals.
Meanwhile, banks’ investment banking activities flourished due to several factors: increased merger and acquisition activity among multinational corporations, the rise of shareholder value ideology, and new opportunities in derivatives markets driven by floating exchange rates and interest rate volatility.
In combination, these trends kickstarted a dependence on finance-led growth underpinned by financialisation.
thejoyofrachel 
Thank you for your insights, Rachel…
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