The global financial crisis (GFC) in 2008 still conjures a dark image of the dangers of banks’ innovations and their destructive potential. This memory is still in the foreground during recent financial disasters. And since 2008, there have been many. While European financial regulators and pundits had started to claim that the financial sector had cleaned up its act and became more resilient, the default of Silicon Valley Bank in March 2023 and subsequent emergency takeover of Credit Suisse yet again brought about a sense of déjà vu and panic. Credit Suisse defaulted, and its rescue represented another instance of a public bailout of a European bank that was ‘too big to fail’. Just three years earlier, in March 2020, the COVID-19 pandemic threatened an equally large financial calamity when the extent of the economic fallout became apparent and financial markets almost collapsed.

What combined the financial mayhems was a US dollar (USD) funding problem and a subsequent supply of USDs by the central banks. When the Swiss bank Credit Suisse collapsed, central banks quickly provided short-term USD funding – not Swiss Francs (SFr) nor Euros (EUR) – to stop other banks following suit. In March 2020, financial institutions across the globe rushed to equip themselves with USD, selling off long-term Treasuries to be able to meet their income shortfall and nearly causing another global credit crunch. To the financial community’s benefit, the Fed also stepped in to meet USD demand, much quicker and to a larger extent compared to the GFC. These barely averted global crises raise the question of why, despite major financial and regulatory efforts since the GFC, so many banks are still so precariously dependent on short-term USD funding. Why is there still such a dangerous USD bottleneck for the functioning of global financial markets?

One obvious answer is that the USD is the global reserve currency. Financial markets and money are hierarchical structures, and financial agents will rush to the apex of the pyramid – the USD, a global financial safe haven – whenever financial turmoil looms. During crises, the USD is in demand while other currencies are sold. US capital markets are the deepest and most liquid markets globally so that they not only provide the safest assets such as Treasury bills, but they ensure steady demand and a variety of other financial securities that can serve as collateral in case an investor needs to monetise their assets during liquidity shortages. One can easily imagine the design flaw of a global system in which every agent suddenly requires the same currency at the same time.

This, however, rather confirms the problem at hand and raises the question of how we ended up in this situation. The fact that European banking giants were dependent on USD funding and could only be rescued with USD – and hence by the US Federal Reserve (Fed) – is historically new. European banks used to enjoy large-scale institutional and public support and were seen as bulwarks within European political economies. What is often seen as a key characteristic of US banks’ power – the fact that they have become megabanks, joining commercial and investment banking to provide a huge range of financial services – the European banks long had. In fact, US banks historically envied European banks for their power and influence over European corporate governance, economic activity and policymaking (Danielson, Reference Danielson2016; Kobrak, Reference Kobrak2007). Why have European banks embarked on this radical transformation in which they became so deeply dependent on US financial markets?

To answer this question, this book reaches into history to analyse processes of financialisation outside the US. I develop the concept of extroverted financialisation (EF) to reframe the transformation of European banking and to develop analytical tools to analyse the causes of and motivations behind financialisation. I put forward the argument that beyond the well-known run up to the GFC, there has been a more fundamental transformation since the 1960s when European banks attempted to root themselves into global USD markets. At that time, European banks had to respond to the rise of new US funding practices that made US banks astonishingly powerful. To be able to compete with US banks, I show that European banks had to partially uproot their operations from their own home markets to institutionalise themselves into US money markets. This shift required a fundamental transformation of the core of their own banking models towards US-style finance. The adjustments and innovations these banks made in the process produced unforeseen changes of their operations that are closely related to their contemporary problems.

This book’s key protagonists are Deutsche Bank and Commerzbank, Germany’s two biggest private universal banks. Focusing on how they have tried to compete with US banks, I trace their transition towards global investment banks and the fundamental problems this has produced for the global financial architecture. Most accounts of German finance locate its transformation domestically in the 1990s when, no longer able to resist the global pressures of rising securities markets, Germany embarked on a project of financial liberalisation. By contrast, the book relies on a longer trajectory that extends back to the 1960s when the banks began to operate in the Eurodollar markets, the first major USD offshore markets proliferating in Europe at the time.Footnote ¹ This long-term global outlook reveals important turning points in their international history which have not yet been accounted for: of the 1970s when the banks began to centralise their operations in London to learn US finance and of the 1980s when they started to arrive in US money markets. Based on this history, I show how German political economy is deeply intertwined with global financial markets. I argue that key to German financialisation has been the banks’ extroverted strategies that forced them to significantly uproot themselves from their home markets and to find ways to establish themselves into US wholesale markets.

From the banks’ perspective, I reassess where financialisation originated, how its processes redrew the boundaries and practices of global finance, and how this translated into Europe. As powerful European financial institutions, German universal banks provide a useful case study for this revisionist history. As such, the book tells the story of the rise and decline of key capitalist institutions – large universal banks – that are often seen as the founding fathers of the European industry and social model. This belief in a European financial system that was different to the US, and somehow more ‘social’, came crashing down during the GFC. Financialisation seemed to have finally caught up with a European political economy that was previously considered immune to the worst of the speculative bouts of global financial markets (Schelkle & Bohle, Reference Schelkle and Bohle2020).

Scholars, experts and politicians alike were quick to proclaim the GFC as a US problem when the crisis first appeared. It was supposedly a product of an ‘irresponsible rise of the laissez-faire principle’ according to Peer Steinbrück, Germany’s federal finance minister at the time (cited in Hardie & Howarth, Reference Hardie, Howarth, Hardie and Howarth2013a, p. 104), confined to the outcome of inadequate regulation and runaway financial markets infused with too much greed and speculation. Less than a week later, he announced the biggest public bailout of a German financial institution to date, €35 billion to Hypo Real Estate. Subsequently, Commerzbank, the now second biggest commercial bank in Germany after its takeover of rival Dresdner Bank in 2008, received a public bailout of around €18 billion (Buch et al., Reference Buch, Koch and Koetter2011) with the German state still owning a 15 per cent stake in it.Footnote ² Barclays, ABN Amro, Royal Bank of Scotland, UBS and Société Générale all experienced similar fates and public bailouts. They fell down the ranks and mostly out of the top twenties (Danielson, Reference Danielson2016). The involvement in US finance brought Europe’s national champions to their knees and they are yet to get up.

German banks in particular have been struggling. Commerzbank disastrously took over Dresdner Bank in 2009 (Paul et al., Reference Paul, Schmitz, Liedtke, Paul, Sattler and Ziegler2020) but Dresdner’s investments in the US mortgage industry produced extensive write-downs so that Commerzbank had to withdraw its US money market activities. It is now trying to redefine itself as a ‘European’ investment bank but is in constant danger of a foreign takeover. Deutsche Bank – often seen as the most successful US investment bank amongst the European lenders – has perhaps fallen furthest. John Cryan, head of Deutsche from 2015 to 2018, emailed his employees modestly: ‘we have ambitious goals, but the numbers do not add up just yet’ (cited in Willmroth, Reference Willmroth2018, own translation). Post-GFC, Deutsche (co-)produced many scandals (cf. Enrich, Reference Enrich2020). In 2016, the world waited aghast for the outcome of Deutsche’s court hearing as the US Department for Justice threatened to ask for USD 14 billion to settle claims connected to Deutsche’s alleged mortgage fraud (The Economist, 2016). The deal was settled for a manageable USD 7.2 billion (The Economist, 2017), but this showed that the US could bring down the German giant (Tooze, Reference Tooze2018, p. 16). What followed was a back-and-forth between expanding and contracting its US business, common amongst the European universal banks attempting (miserably) to keep a foot in lucrative US financial marketsFootnote ³ (Noonan, Reference Noonan2020). The public credit program of the COVID-19 pandemic brought some relief to the German lenders, and they withstood the 2023 turmoil surrounding US-based Silicon Valley Bank. However, their position remains precarious. A few days after UBS’ emergency takeover of Credit Suisse in March 2023, Deutsche’s shares tumbled, and financial commentators were quick to wonder if Deutsche was next in line.

German banks represent a useful example of the pressures and constraints that global European banks faced not only during the crisis but also during the decades preceding the GFC, including USD dependency, the rise of global financial markets and regulatory challenges. I maintain that financial systems have recognisable national and regional coordinates that are important to keep in mind to understand extroverted strategies of individual banks. Other scholars classify European finance or banking as one category (Bayoumi, Reference Bayoumi2017; Schelkle & Bohle, Reference Schelkle and Bohle2020) because European universal banking models possess similar characteristics. This has recently been verified when Credit Suisse’s obituaries in 2023 described similar histories to memorials of Dresdner Bank or a biography of ABN Amro after their falls from grace during the GFC. Incorporating practices of other European banks throughout the book, I show that German banks have often collaborated or acted directly in competition with other European banks when trying to cope with the power of US finance. Based on this history, I can confidently make claims about important imperatives and constraints that European banks faced during financialisation and the precise responses that Commerzbank and Deutsche Bank came up with.

In choosing two different banks, I demonstrate that banks have responded differently and produced distinct paths of EF. I use the terms German banks, Deutsche Bank or Commerzbank, respectively, when I examine their distinct reactions and when those differences matter. Because Deutsche and Commerzbank significantly diverge in their extroverted paths from the late 1980s onwards, I dedicate Chapters 6 and 7 to their individual transformations and show how the forces of EF were dealt with differently according to the banks’ embeddedness in their local context. While the history in this book shows that the rise of US finance posed new imperatives for global markets, causing similar tensions for European banking models, I leave more in-depth research about other European banks for a future project. But in tracing the German transition, I develop broader theoretical conclusions about the US Americanisation of global finance and how we might research its impact in Europe.Footnote ⁴

The US Americanisation of Global Finance

The phenomenal expansion and globalisation of financial markets alongside their multiple crises has been termed financialisation. The term has become ubiquitous in scholarship far beyond political economy. But as as we often find with terminology used to describe large-scale processes, financialisation has become a comprehensive but vague concept used to describe all types of market developments and expansions where a financial investor or practice is involved. An influential description states that financialisation depicts the ‘increasing importance of financial markets, institutions and motives in the world economy’ (Epstein, Reference Epstein2005). The phenomenon of the expansion of markets has come to define one of the key characteristics of financialisation. Indeed, scholars have come to accept that ‘financialisation is marketisation’ (Braun, Reference Braun2020; Godechot, Reference Godechot2016).

This phenomenon has historically been associated with the US. Since the GFC, however, scholars more widely began to associate financialisation with European economies that were previously considered immune to the speculative nature of global financial markets. The increasing use of short-term practices and speculation have raised questions about European’s own shift to financialisation (Schelkle & Bohle, Reference Schelkle and Bohle2020). Thinking of German banks – or at least its biggest players – as resembling US banks represented a big shift in analytical approaches because German banks were traditionally seen as prudent financial actors that provide long-term funding for industrial production rather than engage with financial speculation (Baccaro & Höpner, Reference Baccaro, Höpner, Blyth, Pontusson and Baccaro2022; Hardie & Howarth, Reference Hardie, Howarth, Hardie and Howarth2013a; Heires & Nölke, Reference Heires and Nölke2014; Streeck, Reference Streeck2009). In political economy scholarship, German finance has often served as a paradigmatic case study because it was the quintessential ideal type of a coordinated market economy (CME) with a bank-based system. Germany was seen as providing optimal conditions for high quality production (Streeck, Reference Streeck, Matzner and Streeck1991) because patient capital (long-term loans by banks) supported corporations’ long-term investment to build the necessary long-term capacities such as workers’ education, research and development, rather than having to respond to the short-term pressures of financial markets such as paying out dividends and shareholder value (Lane, Reference Lane2003; Lazonick & O’sullivan, Reference Lazonick and O’sullivan1997; Vitols, Reference Vitols2005). From this perspective, banks monitor and control corporate performance relying on insider information and close relationships, ensured by many cross-shareholdings and supervisory seats. German banks’ own funding relied on stable customer deposits instead of financial securities. Short of bank runs, deposits were seen as more reliable because retail customers tend to be loyal, and bank runs rare.Footnote ⁵

German finance was termed ‘bank-based’ because banks were relatively more important for corporate funding than financial markets. Banks’ assets are 127% of GDP on average from 1992 to 2011 compared to the stock market (39%) and the private debt market (44%) (Baccaro & Höpner, Reference Baccaro, Höpner, Blyth, Pontusson and Baccaro2022, p. 256). Equity and securities markets are seen as ‘underdeveloped’, which often serves as evidence to illustrate the dominance of banks over market-based finance. As the regulatory framework made it difficult for other financial institutions to enter the credit market, the large German banks were powerful not only in the credit business but in the German political economy more generally (Baccaro & Höpner, Reference Baccaro, Höpner, Blyth, Pontusson and Baccaro2022; Fohlin, Reference Fohlin2007; Sablowski, Reference Sablowski, Konings and Panitch2008; Vitols, Reference Vitols1998; Zysman, Reference Zysman1983).

By contrast, US finance is commonly characterised as market-based with short-term financial practices that most closely resemble the ideal type of a decentralised ‘free market’. US financial markets are deep and liquid compared to European markets, and they are seen as competitive as many financial actors must compete for business. Funding on financial markets is associated with an ‘arms-length’ or ‘transactional’ approach to lending. Instead of bank credit, scholars emphasise that corporations often use capital markets to fund themselves. Financial actors would rely on impersonal market metrics to assess non-financial corporation’s performance, instead of insider information that German banks could rely upon (Lütz, Reference Lütz2000). Consequently, it was more difficult to form monopolies and banks lent short-term because they are reluctant to assume the risk of long-term lending via volatile financial markets (cf. Zysman, Reference Zysman1983). As a result, US banks traditionally lacked the power that were attributed to German banks.

Political economy scholars identified a change in these stark national differences from the 1990s onwards, arguing that Europe might be converging to the US market-based framework, though the extent is still debated. Increasing competitive pressures of global (or US) financial markets vis-à-vis coordinated political economies slowly eroded institutional and regulatory frameworks. Scholars refocused their attention to how global transformations affected national economies (Baccaro & Höpner, Reference Baccaro, Höpner, Blyth, Pontusson and Baccaro2022; Callaghan, Reference Callaghan2018; Heires & Nölke, Reference Heires and Nölke2014; Jackson & Sorge, Reference Jackson and Sorge2012; Lane, Reference Lane2008; Maxfield et al., Reference Maxfield, Winecoff and Young2017; Streeck & Thelen, Reference Streeck and Thelen2005). Global trends such as the removal of capital restrictions and growing international trade started to transform national financial frameworks because regulation gave in to market-pressures and global financial flows. Often, it was useful for certain agents or sectors, either public or private, to give in, adopt or use forms of marketisation so that many jurisdictions experienced a partial form of marketisation (Massoc & Benoit, Reference Massoc and Benoit2023), even in sectors we would not necessarily expect, such as German public savings banks (Schwan, Reference Schwan2021).

Scholars have thus refocused their attention to examining how banks performed within the apparent growing importance of financial markets. This was a crucial question because the literature had previously relied on a broad-based consensus that the absence of markets was key to banks’ power. But increasingly since the GFC, scholars found that market logics have impacted banks during financialisation: Instead of providing long-term loans and taking in deposits, banks buy and sell short-term securities in financial markets as a way of funding themselves and corporations, a fundamentally different way of credit provision to the economy. These financial innovations have been recognised as important to large-scale transformations originating in the US and their expansion into Europe (Gabor, Reference Gabor2016b; Konings, Reference Konings2008; Thiemann, Reference Thiemann2018). Banking is an important feature in understanding those issues because the shift away from deposit banking towards trading liabilities as a way of funding produced profound changes in finance (Knafo, Reference Knafo2022). Banks’ business models have been associated with financial globalisation and crisis (Bell & Hindmoor, Reference Bell and Hindmoor2015; Gabor, Reference Gabor2015; Schenk, Reference Schenk, Plumpe, Nützenadel and Schenk2020), an important analytical update because prior to the GFC when financial globalisation was mostly seen as beneficial for global banks.

In response, scholars of political economy have advanced new concepts such as market-based banking (Hardie et al., Reference Hardie, Verdun, Maxfield, Hardie and Howarth2013), market-based finance (Gabor, Reference Gabor2018; Mertens & Thiemann, Reference Mertens and Thiemann2018), shadow banking (Ban & Gabor, Reference Ban and Gabor2016; Nesvetailova, Reference Nesvetailova2018; Pozsar et al., Reference Pozsar, Adrian, Ashcraft and Boesky2010) or deal-based finance (Deeg, Reference Deeg, Wood and Lane2012; Jackson & Deeg, Reference Jackson and Deeg2012) to depict the fact that banks have marketised their own balance sheets and shifted away from their original purpose of long-term credit provision to the productive sector. This shift has important implications for the stability and risk within the global financial architecture: As European banks do not have to assume the risk of holding long-term loans anymore, they can play with short-term value and speculative practices on capital markets, just like the US investment banks. While financialisation is associated with marketisation, banking is seen as the marketisation of banking practices, and banks turned into market-based banks (Hardie et al., Reference Hardie, Howarth, Maxfield and Verdun2013; Hardie & Howarth, Reference Hardie, Howarth, Hardie and Howarth2013a).

What is surprising about this development is that European banks seem to be doing so much worse than US banks. If European banks became more market-based like US banks, why were US financial institutions not more affected by the GFC than their European counterparts? In the US, the shift from financing patient capital to market-based securities has all but increased the share of profits of financial institutions (Gibadullina, Reference Gibadullina2023). While Deutsche, Commerzbank and co. have had to significantly withdraw from their US activities, US banks have been striving, reaping profits above and beyond anyone else, not only in the US but also in Europe. In 2016, the top three banks in Europe in terms of investment banking revenues were US banks (Danielson, Reference Danielson2016, p. 9). London, still Europe’s most important financial centre, depends on the European subsidiaries of Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America and Citigroup – all US banks (ibid.). The big four US banks have left their European counterparts far behind (Danielson, Reference Danielson2016, p. 58). Apart from a brief interlude in the early 2000s, why have the biggest European banks fared so much worse than their US rivals in this market-based world? What is it about financialisation that has produced this outcome?

I argue that the difficulty in understanding the US Americanisation of finance stems from our inability to grasp the nature of financialisation. There is remarkably little historical inquiry into the significance of banks as major capitalist agents, the contributions of foreign agents to US-led financialisation and the corresponding mechanisms of US financial power. Beyond simply representing a gap of historical inquiry, I will show in Chapter 2 that this analytical problem stems from a limited understanding of the processes of financialisation as a qualitative change in the social relations of finance.

I agree with the sentiment that financialisation describes a large-scale transformation that has led to expanding and globalising financial markets, and that this process has deeply affected how banks, and anyone else for that matter, can navigate financial markets. But the outcome (expansion of markets) rarely sufficiently explains its driving mechanism. Therefore, the chief aim of this book is to explain why and how that came to be, a question often assumed rather than explained. I ask why the expansion of global finance has been built predominantly around US financial practices, rather than acquiring any other potential characteristics. This is important because, firstly, history is unpredictable and complex. European banks have had many international relations and ambitions, financial globalisation could have gone a different way. This book thus examines why the banks adopted US financial practices, with all the difficulties involved, and, importantly, why those practices have had such a transformative impact.

Secondly, marketisation as a concept cannot account for the wide-reaching qualitative change of financialisation. In this spirit, I show that financial markets are nothing new in Germany. In Chapter 3, I use the example of the Pfandbrief (covered bond) to show that German housing finance has a long tradition of funding with market-based products, much more developed than the US market-based system. Chapter 4 reveals the German banks’ global market-based practices on the Eurodollar markets in the 1960s and 1970s and argues that these were part and parcel of financing the post-WWII German political economy.

The significance of these early market-based practices for theorisations of financialisation is easy to miss if we continue to focus on German finance as a national bank-based system which transformed in response to external markets as a ‘national variety’. Scholars rarely analyse how German banks have engaged with global financial markets before 1990s when their impact became no longer ignorable. As a result, political economy scholarship has largely overlooked both traditional domestic and early global market-based practices in their theorisations of banking and financialisation. This is because conceptualising US finance’s impact as the rise of markets vis-à-vis social institutions makes it difficult to understand how specific market practices have affected banks differently and how, consequently, banks act in financial markets. As this book will show, rather than being bulwarks against markets, banks have historically attempted to use markets for their own ends.

How about recent analysis of banking since the GFC? While German banks’ have been sidelined historically, scholarship since the GFC have investigated the interconnectedness of US and European balance sheets to decipher the outcomes of the Americanisation of finance. And yet, while the US and European banks’ responsibility for the GFC is much debated, most political economy accounts rarely move beyond the banks’ investment into speculative sub-prime mortgage-backed securities (Bell & Hindmoor, Reference Bell and Hindmoor2015; Fligstein, Reference Fligstein2021; Hardie & Howarth, Reference Hardie, Howarth, Hardie and Howarth2013a) or their lobbying behaviour since (Hardie & Macartney, Reference Hardie and Macartney2016; D. J. Howarth & James, Reference Howarth and James2023). Paradoxically, the scholarship portrays a tendency to read issues of finance as something tangential or external to the European banks. Curiously, therefore, scholarship working on the banks themselves locates the problems of banking as peripheral or external to the everyday business of the banks.

Representing this paradox is Tamin Bayoumi, currently deputy director at the IMF, and part of an influential group of scholars analysing how the changes in European banking led to the GFC, centring the instability of USD shadow banking between Europe and the US as a key cause (also compare Borio & Disyatat, Reference Borio and Disyatat2011; R. McCauley, Reference McCauley2018; Thiemann, Reference Thiemann2018; Tooze, Reference Tooze2018). Remarkable for an Economist, Bayoumi (Reference Bayoumi2017) conceptualises the speculative investments of European banks prior to the 2008 crisis as a key sociopolitical problem rather than simply a ‘market failure’. It was the European banks’ speculative USD practices that made them the epicentre of the GFC. However, somewhat ironically, Bayoumi sees the problem of banking predominantly as a regulatory failure: policymakers failed to restrain or foresee the banks’ USD funding bubble. Rather than looking for an internal banking dynamic, he identifies an external problem in which regulators lost against the markets. As a result, we continue to puzzle over why and how European banks brought themselves into a precarious position where a US sub-prime crisis could suddenly drain their funding channels.

The point here is not to argue that regulation does not matter. On the contrary, I will show that regulatory differences between Europe and the US were key to processes of financialisation. There is indeed much to gain from better regulated financial markets. For example, Thiemann (Reference Thiemann2018) demonstrates how global markets cannot exist without its regulators. Germany’s experience of the GFC was much worse than France’s because German regulators failed to regulate ‘their’ banks so that the German lenders shifted further towards speculative practices (Thiemann, Reference Thiemann2012). However, the fact that European banks participated in US markets is rarely sufficiently problematised. Rather than searching the culprits in markets or regulation, we need a precise understanding of how financial innovations spread across the globe to establish why these banks participate in those processes. Leaving banks’ practices, their motivations, and constraints untouched analytically and politically sidelines the very problem we need to tackle.

Moving beyond ideal types, national institutions, and markets is important because banks often behave counterintuitively to what we assume they would do. Political economists have shown that financial strategies have either pushed the limits of what seemed possible (Bryan et al., Reference Bryan, Rafferty and Wigan2016; Wigan, Reference Wigan2010) or have spectacularly failed. These extremes do not necessarily create observable quantitative – or marketised – patterns but are nonetheless important for our understanding of financialisation. Recent developments would have traditionally been associated with being conducive to the European way of banking. We have seen an increase in deposit funding, a withdrawal from US and Eurodollar wholesale markets by the Europeans, as well as the return to a more European ‘boring’ type of banking away from ‘markets’. As Bell and Hindmoor (Reference Bell and Hindmoor2018) have shown, leverage has fallen across the spectrum of banks in 2015 compared to 2005Footnote ⁶ and so has income derived from non-interest sources. From traditional perspectives, this should usher in another period of European glory – or at least an avenue away from perennial problems. Why, then, are large European banks still in this mess?

To answer this question, the book foregrounds the practices of German banks as central to the making of financialisation and the uneven power relations that emerged with the rise of US finance as a key constraint to the banks’ operations. I argue that only by juxtaposing both can we understand the transformative impact that US finance unleashed onto foreign agents. I propose to eschew functional understandings of banking and markets and to differentiate between specific forms of market-based finance so that we can start to identify more precisely the imperatives and constraints of US-led financialisation. This will open the analytical space to take banks seriously as the makers and gatekeepers of debt in a highly leveraged financial system. I thus aim to unpack the motivations and limitations of the German banks to build ever more precarious financial relations in their quest to catch up to US banks. Based on this alternative understanding of finance, the book provides a new account of financialisation outside the US.

Extroverted Financialisation

The key argument of the book is that European banks underwent a unique process of EF. I propose this original concept to analyse the transformation of banking in response to the rise of US finance. More specifically, EF portrays the rise of US-style finance in Germany as an outcome of a major shift in the way US banks funded themselves from the 1960s onwards. US banks began to use securities issued in US money markets as a systematic way of funding, which allowed them quicker access to larger amounts of funds so that they began to outcompete other banks in global markets. This strategy, called liability management (LM), imposed a novel imperative for non-US banks: gaining more USD debt. This forced the banks to partially uproot themselves from their home markets. In Chapter 4, I show how German banks went to the Eurodollar markets in Luxembourg and in London to respond to the new competitive advantages of US banks. But to operate in those markets they had to learn US-style finance to keep up with the US innovations. To properly learn and execute US financial practices, however, they had to gradually relocate key operations into the US, as I show in Chapters 5–7. This process was a key driving factor of the transformation of the nature of German banking. As I show in Chapter 8, despite attempts to keep US and German financial practices separate, German banks could not help but reform their whole business models according to the liquidity requirements of LM.

EF seeks to account for why banks outside the US have sought to adopt US practices and to establish themselves in US financial markets with the example of the two largest German universal banks, Deutsche Bank and Commerzbank. Rather than being a straightforward translation, these markets rested on fundamentally different financial institutions, practices and norms compared to German and European financial markets. As Chapter 2 will demonstrate, US banks have been developing their strategies organically alongside US financial institutions, but when US banks started to outcompete the Europeans in Europe, German banks had to find ways to bridge the differences. To compete with US banks, German banks had to partially uproot themselves from their home markets and gradually implement the practices of LM themselves. While financialisation was thus an active process shaped by the banks themselves, this process of extroversion was also a key constraint for the banks’ practices as they had to reorient themselves towards US finance.

While this eventually allowed some of the European banks to reap phenomenal profits, EF foregrounds the problems encountered by financial agents who seek to imitate financial practices that have been developed in different contexts. In extroverted financialisation, the key imperatives for change came from foreign impulses, rather than domestic or internal ones. This process of translation was not easy, and as I will highlight throughout the book, non-US banks encountered many problems. Most importantly, and to the banks’ dismay, adopting LM was incompatible with their traditional financial practices. Outside a brief successful period in the 2000s prior to the GFC, the banks’ actions resulted into the inherently contradictory and devastating nature of banking and of the global financial architecture as a whole.

I maintain that the problems and tensions of translation are more revealing about the imperatives of financialisation than potential profits or the general increase of financial markets. The currency gap between the dollar and, for example, the euro, the pound, or Swiss franc, is an obvious difference. More important, however, was the fact that European banks had to learn a new way of banking and they must do so within an institutional context that was not conducive to their traditional financial practices, as I will show in detail throughout the book. As a result, much of their financial innovations was geared towards overcoming those hurdles to catch up to US banks that were exploiting financial transformations much more easily. While few people disagree with the claim that something has gone wrong on global financial markets during the last decade, we have come to accept multinational corporations as profit-seeking entities that seem to benefit from globalisation and somehow always win. Powerful agents’ problems are seldomly incorporated in our conceptualisations of financialisation. Not negating that some banks and traders have made millions and billions in the process, I show how the German banks’ challenges and tensions during EF offer a useful window into the power relations and contradictions of the global financial architecture.

I foreground banks’ practices to make the transformations and contradictions of financialisation visible. To this end, I deploy a balance sheet analysis and descriptive statistics. However, while many banking practices are written onto banks’ balance sheets, this type of analysis is of limited use in studying financialisation beyond assessing the marketisation of banks’ loans because it cannot capture (a) qualitative change, (b) attempted but failed strategies, and (c) banking practices that happen offshore and thus outside banks’ balance sheets. Indeed, history does not easily present itself in data, ready for us to read or calculate. Offshore is notoriously difficult to come by (Binder, Reference Binder2023) and banks commonly prefer to act in secret (Wixforth, Reference Wixforth2017). The Eurodollar markets – the biggest offshore financial markets – escape official statistics; scholars of the Bank for International Settlement estimate USD 10.7 trillion ‘missing’ USD (Borio et al., Reference Borio, McCauley and McGuire2017), and studies on Eurodollar markets regularly issue a notion of caution because of data limitations (McCauley et al., Reference McCauley, McGuire and Sushko2015).

Thus, tracing the problems of finance, and banks’ responses to them, is somewhat difficult. I circumvent this lack of data by combining a varied mix of academic scholarship, the banks’ own publications, specialised financial news articles, in addition to balance sheet analysis, as well as official governmental and monetary authorities’ reports. These provide comprehensive material to gather and triangulate publicly available data about banks’ strategies and the social relations of finance. Revisiting historical academic analysis and previously unused journalistic and expert practitioner accounts is a valuable resource in grasping the problems the financial world faced at times of their writing and what the banks themselves deemed as problems and solutions at that time. This is a new window into the practices of banks, as these issues are often different from what we now theorise about them from a contemporary perspective. Juxtaposed with critical political economy scholarship, these insights have allowed me to reinterpret the history of financialisation from the German banks’ perspective. This, I argue, offers a new methodology for studying corporate business models as sites of financialisation.

This history has led me to develop larger theoretical claims and the concept of EF makes four interventions in how we understand the financialisation of European banks: As part of a growing group of scholars emphasising the importance of LM (Beck & Knafo, Reference Beck, Knafo, Mertens, Mader and van der Zwan2020; Dutta, Reference Dutta2020; Knafo, Reference Knafo2022) and leverage (Baines & Hager, Reference Baines and Hager2021; Sgambati, Reference Sgambati2019) for financialisation, firstly, EF underscores that financialisation is foremost driven by LM – a funding practice developed in the 1960s in New York that revolutionised funding and caused significant problems for banks’ traditional strategies of funding with deposits. EF secondly draws attention to the fact that this shift in funding methods (as US banks started to expand into Europe via the Eurodollar markets) implied a shift in the dollar’s role for non-US banks. The book shows how this was a key prompt for a change in traditional banking practices towards extroverted strategies that were geared towards foreign markets and, therefore, finding novel methods of USD acquisition. Thirdly, the concept accounts for the influence of institutions that organise financial markets and enable the practices of LM and leverage. US money markets uniquely accommodate practices of LM to which German banks had to adapt if they wanted to participate in global financial markets. Originally, LM could only be developed in the US, as European money and capital markets were not suitable to the fast-paced requirements of LM. And finally, EF reads global finance’s capacity for crises as substantial internal and external contradictions caused by the managerial and operational changes that LM implied for banks operating from the periphery to US money markets.

Using EF, the book throws new light on how the macro-processes of US-led financialisation interact with the micro-processes of Deutsche’s and Commerzbanks’ business models. German banks operate from a peripheral position to US financial markets, and overcoming this outsider position was a key driver for their financial innovations since the 1960s. This history shows that they have been much more international than hitherto recognised and, therefore, have been key contributors to financialisation, if from a peripheral position. By key contributors, I mean that they actively responded to the imperatives of LM and thereby forged new financial relations in on - and offshore USD markets. While they intentionally tried to empower themselves within these new competitive pressures, the banks did not deliberately create the conditions for their own demise. Chapter 7 shows Commerzbank as attempting to perform a half transformation to avoid losing control of its ‘European’ business. Chapter 8 highlights how unlikely it was initially for Deutsche to transform so thoroughly. But aiming to successfully take advantage of US money markets, it could not help but to integrate the practices of LM, which deformed its German financial practices. US banks on their part did not consciously suck European banks into this new way of banking. They, too, reacted to the rise of US money markets in the 1960s, a development initially not of their own making. But they subsequently discovered the power of LM, a global competitive advantage few escaped. No one could have known how deeply this would affect the financial world in the following decades.

EF thus frames financialisation as a long-term transatlantic historical process. I locate the start of financialisation before the fall of Bretton Woods in the early 1970s, before large-scale initiatives of financial liberalisation in the 1980s, and before the 1990s or 2000s, decades that are commonly seen as the cornerstones of financialisation in Europe and in banking. I do not dismiss these transformative moments, but key dynamics of financialisation go amiss if we limit ourselves to that periodisation. This rethinking of financialisation and its inherent contradictions is, so is my hope, my analytical contribution to start thinking about a more fundamental way forward to an alternative financial future.

The book joins a growing political economy scholarship that foregrounds power relations and financial claims in offshore and onshore markets (Braun & Koddenbrock, Reference Braun and Koddenbrock2023). From that perspective, the politics of finance are located within financial relationships themselves, rather than relegated to issues of governance, (de-)regulation or macroeconomic recycling mechanisms. Based on EF’s re-conceptualisation of financialisation, this book advances the theoretical claim that financialised market power rests on agents’ ability to use LM to leverage USDs. The book thus portrays financial markets as uneven institutions that are made and remade as banks compete over resources. Financial agents outside the US therefore operate from a peripheral position and must deal with uneven power relations that benefit US banks. This is a necessary theoretical reorientation to specify the imperatives of financialisation in global markets, and to make it traceable from the perspective of key financial conglomerates.

It is vital to note that while uneven global financial markets might appear as solid structures, they have historically developed. I show in Chapter 2 that the structural constraints that drove European banks to adopt US-style finance, the reasons for foreign banks’ systemic reliance on USD liabilities, and, consequently, the rising structural power of US finance developed from the fundamental changes in US funding practices that are traceable back to the 1960s’ rise of US money markets that led US banks to develop LM. Importantly, the history presented in this book shows financialisation as a process of the unintended consequences the German banks’ attempts and failures to empower themselves. The concept of EF, then, emerges as an analytical tool to frame US-led financialisation so we can trace how changes in financial practices can result into a large-scale structural transformation. These have allowed some financial agents to exploit financial markets to no end while it had devastating outcomes for all those who must live with finance’s influence in our social and economic lives.

Synopsis

The book is divided into two parts and nine chapters. The first part of the book revisits and revises common historical and theoretical accounts of (German) banking and finance. Chapter 2 takes up the preceding discussion by debunking three myths that dominate political economy accounts of financialisation: (a) that financialisation is best understood as a process of marketisation; (b) that financial systems transform in response to external drivers (i.e., liberalisation) as ‘national varieties’ conceptually outside the global economy, rather than as embedded within it; and (c) that German finance is best conceptualised as a bank-based system which transformed into a hybrid from the 1990s onwards. I show how the concept of marketisation captures the expansion of markets but struggles to identify fundamental transformations within markets. As a result, political economy scholars rarely study banks in their own rights and underestimate the power and weaknesses of banks as agents of financialisation.

Instead, I propose an alternative reading of financialisation. I provide a recalibration of banking which zooms in on the rise of LM in the 1960s as a central origin of processes of financialisation. I document how the practices of LM arose out of the restricted financial system in the US but allowed US banks to increase their power almost unhinged. Building on this historical reorientation, I outline the concept of EF, which frames the analysis of the book. EF has four features that each represent a new imperative for European banks: (a) the rise of LM; (b) the need for USD; (c) the institutional specificity of US money markets; and (d) the contradictions of contemporary banking. This chapter thus provides the key theoretical building blocks and explains how focusing on financial practices allowed me to conceptualise the response of European banks to the rise of LM as EF.

Chapter 3 starts the recalibration of banking by telling an alternative history of German banking. We cannot assess change if we do not understand its origins. Therefore, this chapter zooms in on the struggles over deposits to provide the historical and institutional backdrop of German finance. This will allow the reader to appreciate the key differences and overlaps in US and German financial markets, and to understand those financial developments that set them apart from the 1960s onwards. I go back to the nineteenth century to examine the development of the Pfandbrief (covered bond) to establish that market-based funding practices have a long history in Germany. After the devastation of the Seven Years’ War (1756–1763), banks and the state (the Prussian price and its gentry) together sought new ways to boost lending and borrowing with the help of financial securities and collateral. This history challenges a core assumption about German finance: that there is a distinct dichotomy between market-based and bank-based finance. In fact, German housing finance was historically much more market-based than in the US.

The Pfandbrief has been a key financial security promoting long-term lending and relationship banking. To understand its significance in the story of financialisation, however, I differentiate between financial agents: The Pfandbrief was predominantly used by specialised mortgage banks and public savings banks. Universal banks only entered the fray in the 1970s, at a time when their corporate deposits declined. This chapter thus locates the origin of financialisation within a more precise historical context: German banks’ strategies were geared towards market-based practices, but different ones to those that emerged in the US with the rise of LM. While US banks turned to US money markets to compensate the drop in liabilities, German banks tried Pfandbriefe. Contrasting covered bonds with US mortgage-backed securities, I underscore that not all market-based practices necessarily lead to processes of financialisation. This historical grounding allows me to specify the precise imperatives and constraints of financialisation and thus to better understand the impact of US finance.

Doing just that, Chapter 4 situates the beginnings of EF at the time when US banks started to build the Eurodollar markets from the 1960s onwards. The Euromarkets are an important turning point for financialisation but their impacts on European banking are rarely examined. During this global rise of US finance, German banks had their first contact with the new US innovations. While Chapter 3 revisits a very early domestic financial history, this chapter examines the links of the German post-WWII reconstruction era with global markets. These connections reveal a vital impact of US funding practices on German financial strategies very early on, and significantly before the 1990s when many accounts date the impact of globalisation. Instead, I argue that the making of the German CME was already bound up with global financial markets.

The reason was that Germany’s financial architecture was ill-equipped to fund the growing export sector. Public support for corporate governance was geared towards promoting the export sector, wage restraint and domestic capital markets. As a result, domestic funding was available but German banks lacked USD to lend to internationalising corporations. This was an important internal push factor for the large banks to seek USD in foreign markets. US banks aggravated this shortcoming with their competitive advantages through the practices of LM. The European banks attempted to pose a counter-strategy against the US takeover of their corporate loans: joint European bourses. However, due to different strategic interests amongst the French, Swiss and German banks, this strategy did not materialise. Instead, European banks grudgingly embraced Eurodollars to catch up to US banks and tried another strategy: club banking in Luxemburg. They joined resources to expand their leverage and split the risk involved in these unknown markets. Despite initial successes, however, a more radical change in strategies – rather than simply pooling – was needed to keep up with US banks. European banks had to shift to London – the US financial innovation channel – to embrace US financial practices more comprehensively. Through this history, I argue that the transformative impact of US finance is not market expansion or regulatory evasion through offshore per se. Instead, financialisation has posed distinct imperatives in relation to LM that induced a qualitative change as LM fundamentally differs from previous international strategies, and started to require a relocation of banks’ key operations.

Having established a different understanding of US finance and its initial global impact, the second part of the book traces how German banks attempted to adjust to the rise of LM. I use the concept of EF to explain why banking turned out to be a specifically US form of banking – an outcome that is well-recognised in political economy, but without its causes being historically interrogated outside the marketisation thesis. I call this form of banking ‘financialised banking’ to stress the difference between previous forms.Footnote ⁷ Zooming in on Deutsche Bank and Commerzbank, this part reveals the rise and fall of the German banks by tracking their aims and the problems they encountered in transforming towards financialised banking. Part II thus exposes the ways in which the micro processes of changing business models can produce the macro process of financialisation.

Chapter 5 lays out the institutional grounding for global financial markets and their currency, the USD. This provides an answer to an ongoing puzzle on the origins of the 2008 financial crisis. Scholars of the ‘global banking glut hypothesis’ recognise that European banks were deeply connected to US finance but do not fully account for why this was the case. By contrast, I demonstrate that, despite their global nature, US and Eurodollars are still thoroughly grounded in US financial institutions.

The connections between New York and the Eurodollar markets gave US banks an additional competitive edge over other banks. The complex institutional infrastructure made US financial markets exceptionally deep and liquid so that US banks could flexibly fund their practices and arbitrage between both markets. US money markets were a rare financial resource at the time allowing US banks to tap endless USD, a key reason why LM was uniquely suitable to US markets. By contrast, European banks faced heavy restrictions on international capital flows and foreign entry from policymakers until the 1970s. This posed a key constraint to the international practices of the European banks. Instead, German banks had to expand their offshore USD funding practices.

Chapter 6 delves into the heart of Deutsche Bank’s transformation towards a US investment bank by situating the changes of its business model within its play of catch with US banks. To compete in Eurodollar markets, German banks had to find a way to access US financial markets beyond their offshore networks in Luxemburg and London, and thereby institutionalise their connections to US money markets. The attempts to adopt LM thus drove Deutsche’s partial uprooting from its home markets to relocate to the US. This challenges the dominant narrative of a US imposition, instead recognising that the trajectory of change was driven by Deutsche’s strategies of extroversion. Tracing the specific changes of Deutsche’s foreign acquisitions and US financial strategies on US money markets, I demonstrate how Deutsche progressively had to change its traditional practices to accommodate the imperatives of LM. This transformation went from a change in funding strategies to acquire more USD to the subsequent adaptations on its asset side – from corporate loans to US residential mortgage-backed (or ‘toxic’) securities. This chapter thus presents Deutsche’s move away from the centre of Germany Inc. towards a US investment bank as an outcome of its progressive institutionalisation in the US.

Chapter 7 traces Commerzbank’s trajectory of financialisation to highlight how its strategies with respect to LM differed from those of Deutsche Bank. Commerzbank is a less-likely actor of financialisation as it is a smaller bank and has historically focused on the European SME sector. While all major German and European banks were impacted by imperatives and constraints originating from the US, and therefore transformed their banking strategies by acquiring British or US financial institutions and traders, they did so in different ways. In contrast to Deutsche, Commerzbank attempted a transformation without major relocation, and redirected fewer resources to its extroverted strategies. While it established the first German foreign branch in the US in 1971, it never bought a major US or British institution.

Commerzbank’s more hesitant approach meant that the bank failed to uphold itself in US money markets several times. While Commerzbank initially also expanded to London in the 1970s and 1980s, it subsequently spent fewer resources to advance its USD wholesale integration. Its renewed attempts in the 2000s failed, and Commerzbank’s significant immersion happened during the GFC when, ironically, it bought another German not US bank. It purchased the larger Dresdner Bank during the 2008 financial crisis but could not manage Dresdner’s heavy investment into USresidential mortgage-backed securities (RMBS), eventually resulting in a public bailout. Commerzbank’s story is different from that of Deutsche, demonstrating that the rise of US finance made LM a significant but differentiated concern for non-US banks.

Chapter 8 reemphasises that the transition to financialised banking was no easy shift and only saw huge profits for a limited amount of time for European banks – at least if compared to US banks. I document the problems and contradictions that banks experienced internally and externally. I thus lay out the reasons for why I think the transition to LM is better understood as a necessity to accommodate the higher costs, risks and logics of banking in US money markets, rather than a straightforward shift towards higher profits compelled by securities markets. To emphasise how unlikely it was initially for Deutsche to transform so thoroughly towards LM, I trace the resistance of Deutsche’s own bankers towards the new practices in the 1990s and early 2000s, which they saw as a loss of their traditional power and autonomy over banking practices. Nonetheless, it took the financial calamity of 2008 to propel a rethinking of Deutsche’s path.

And yet, financialised banking is not easily reversed. I underscore this argument by tracing the German banks’ efforts to get out of their malaise. Since the GFC, German banks have been struggling because German banking is now caught between two opposing logics – German patient capital and LM – within neither of which German banks seem to be able to (re-) gain strengths. Having built expensive USD funding networks and a significant of USD-denominated assets in their books, they must sustain their USD needs as well as accommodate their costs. As such, regulators and analysts alike would be well advised not only to worry about banks’ funding gap, the gap between (bank-based) deposits and market-based securities to refinance their assets, a common worry that replicates the trope of opposing banks to markets. Instead, emphasising the history of EF, I show how the USD funding gap (the gap between EUR as home currency and USD as foreign currency) is a key source of vulnerability and risk. At the same time, some US banks have excelled in mastering LM so that, for them, the ability to flexibly (mis-) match their assets with US money market funding is a source of power and strength. This chapter thus underlines how the unevenness of an LM-centred global financial architecture has only been entrenched by the Europeans’ extroverted strategies. It is for this reason that recent attempts to build ‘national champions’ either as proactive or rescue merger fail to yield their geopolitical promises of strong global banks regaining control over global markets. What regulators and analysts alike have missed is that the key to global market power is not the size of balance sheet per se, but the banks’ capacity to leverage beyond ends by exploiting large, deep and flexible pools of capital, something only USD wholesale markets can currently supply, and LM can exploit.

The conclusion summarises the book and further reflects on what is at stake in reconceptualising the transformation of European banking as EF. I contemplate other recent financial endeavours to ‘improve’ our global financial architecture and find them – unsurprisingly given the history I outlined here – somewhat lacking in their ability to introduce a global financial system that serves social rather than financial ends. In fact, missing the implications of EF, some of these endeavours have the potential to worsen, rather than improve, the threats of credit crunches and crises. Alternatively, we might be better off to contemplate more radical solutions that tackle the very nature of USD credit creation and the financial architecture itself.