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Digitalisation in financial markets around the world is rapidly growing. With the closer attention to two political economies and two biggest financial markets, i.e. that of the European Union and the United States of America, the comparative analysis sheds light to perspective trends in banking sector and digitalisation of financial services.
In the background of the financial markets in these two global regions (the US and the EU-27) are specific types of “capitalism” explored in the US and the EU. Capitalism in theory is often approached as an economic system, in which private actors own and manage property according to their interests, and demand-supply equilibrium freely set prices in markets in a way that can serve the best of social interests; however, the essential feature of capitalism is the motive to make a profit. The US is often seen as having a “democratic capitalist political-economic system” with at least three pillars: – economic incentives through free markets, – fiscal responsibility, and – liberal moral-cultural system that encourages pluralism. It is kind of A mixed economy, which embraces the free market in using capital (hence, the “capitalism”) and involving government intervention for the public good.
There are world-wide –again in theory – three ideal‐typical models of capitalism: a) market capitalism, b) managed capitalism, and c) state capitalism; in all three, business, government and labour relations are all closely interconnected, at the same time leading to distinctive systems. More in: a) https://courses.lumenlearning.com/suny-internationalbusiness/chapter/reading-capitalism-in-the-us/; and b) https://www.aier.org/article/capitalism-in-three-principles/
The EU’s political-economic model resides on the so-called “social market system”, which is a unique in world “social market” organisation of economy facilitates growth alongside reduction of poverty and inequality. Small and medium-sized enterprises are the backbone of the EU’s economy; the EU institutions are trying to strengthen them, through two sub-unions: completion of the capital markets union, CMU and deepening economic and monetary union, EMU. The social market economy is opposed to both the laissez-faire policies and to socialist economic systems: it combines private enterprise with regulation and state intervention to establish fair competition, maintaining a balance between a high rate of economic growth, low inflation, low levels of unemployment, good working conditions and social security system.
“Social economy” covers entities sharing the following main common principles and features: the primacy of people as well as social and/or environmental purpose over profit, the reinvestment of most of the profits and surpluses to carry out activities in the interest of member states/users (“collective interest”) or society at large (“general interest”) and democratic and/or participatory governance.
Traditionally, the term social economy refers to four main types of entities providing goods and services to their members or society at large: cooperatives, mutual benefit societies, associations (including charities), and foundations. They are private entities, independent of public authorities and with specific legal forms; additionally “social enterprises” are now generally understood as part of the social economy creating about 14 percent of GDP. Social enterprises operate by providing goods and services for the market in an entrepreneurial and often innovative fashion, having social and/or environmental objectives as the reason for their commercial activity. Profits are mainly reinvested with a view to achieving their societal objective. Their method of organisation and ownership also follow democratic or participatory principles or focus on social progress.
More in: https://social-economy-gateway.ec.europa.eu/about-social-economy/social-economy-definitions-and-glossary_en
The US “political economy”
The US gross federal debt, the so-called sovereign debt, equals to about $35 trillion; it is held by the public sector plus debt held by federal trust funds and other government accounts. In very basic terms, this can be thought of as debt that the government owes to others plus debt that it owes to itself. It equals to about $104 thousand per person in the US; i.e. almost all sovereign debt is held by the public; besides, national debt is rising by about $1 trillion every 100 days.
Quite notable that during 1972-79, the public debt was about 30 percent. Presently, the US sovereign deficits are caused mainly by such structural factors as aging baby-boom generation, rising healthcare costs (it means that the state must prepare for the financial needs of longer retirement), as well as a lax tax system (it is about 10-15 percent lower than that in the EU) that does not bring in enough money to pay for what the government’s growth efforts. Projected senior population (65+) will grow from 40.5 mln in 2010 to about 97 mln in 2070.
The balance between public revenues and spending is in great disproportion: i.e. with about $4.4 trillion in revenues and about $6.1trillion in spending (!).
Over 80 percent of US citizens say they want the government and the Congress to spend more time addressing the debt, and 82 percent say their level of concern has increased over the last few years. Several countries in the world are having great public debt, e.g. Japan with about 255 percent of GDP, some African governments, as well as numerous EU states (like Greece with 172 percent, Italy with 141 percent.
Source and citation from: https://www.pgpf.org/national-debt-clock; additionally: https://worldpopulationreview.com/country-rankings/countries-by-national-debt
Banking sector: US vs. EU
= There are over 4.5 thousand banks in the US; that’s a decrease of 138 banks from the end of 2022 with 4.715 banks. Among 12 largest there are, e.g. JP Morgan Chase with about 89 mln customers, Bank of America, BOA with 68 mln customers, Wells Fargo with 70 mln, Citigroup, etc.; e.g. Goldman Sacks is on the eight place. About 30 percent of stick in these banks is held by retail investors.
There are the following depositary institutions in the US: commercial banks, so-called thrifts (i.e. credit unions and mutual savings banks that provide a variety of savings and loan services; they are called “thrifts” because they originally offered only savings accounts or time deposits) and credit unions. It is important to mention that financial market’s service in the US accounts for about 8.3 percent of national GDP, or $1.7 trillion.
= As to the EU, there are presently over 5 thousand banks for the population of about 500 mln, compared to 4.5 thousand in the US with population of 345 mln; there were about 6 thousand banks in the EU in 2019 and 162 thousand branches. Every year about 10 thousand branches are closing due to transition to digital services.
The biggest banks in the EU are: BNP Paribas with assets of €2.6 trillion, HSBC in London with €3 trillion, Deutsche Bank with € 1.3trillion. With a market share of 17.1 percent, Deutsche Bank occupied the top position in the country; Commerzbank came second with a share of 16.4 percent. Following slight losses, DZ BANK secured the third ranking, with a market share of 16.3 percent. WestLB is ranked fourth with a market share of 14.3 percent). German banking industry acquires for over €9 trillion, which two times bigger than the national GDP (!). In the European continent, five states hold the most of financial assets: the UK, France, Spain, Italy and Germany. As to the EU-27, half of the banks’ assets belong to four member states: Germany (28%), Poland (11%), Austria and Italy (both with 9%); total banking assets in the EU equals to about €40 trillion, or 292 percent of the EU-27 GDP.
Largest financial assets (in €) are in France with 11 trillion, or 454 percent of its GDP; Germany with 9 trillion, or 266 percent of GDP: Italy with about 4 trillion, or 232 percent of its GDP; one of the biggest banking assets compared to GDP are in Denmark with 400 percent.
Main governments’ revenues – about 40 percent of the total GDP – in the EU are coming from taxes and social contributions: the biggest are that of Denmark and France with about 53 percent, Ireland with 52 percent, followed by Austria and Sweden with 50 percent each.
Since 1989, the EU created the European Central Bank, ECB in Frankfurt-am-Main, Germany with the tasks of managing the common currency and banking supervision through the Single Supervisory Mechanism.
The ECB’s objective in the EU-wide monetary policy is to keep prices stable, as well as to keep inflation at 2%, and states’ public debt at 60 percent of GDP in order to support the member states’ general economic policies aimed at full employment and economic growth.