This is an edited version of a piece that appeared in the European Financial Review and relates to the work I have recently conducted with Stephen Bell concerning our jointly authored monograph  Masters of the Universe, Slaves of the Market and an article published in the British Journal of Politics and International Relations, which was awarded the best article prize for that journal in 2015.

The banking and financial crisis that peaked in 2008 and that destroyed many of the major US, UK and European commercial and investment banks in the key New York and London markets was, as the former Chairman of the Financial Services Authority, Lord Turner, puts it, ‘arguably the greatest banking crisis in the history of financial capitalism’. Very few bankers fully understood the scale and complexity of the new financial markets they had created, with their vulnerabilities and huge ‘systemic risks’ and their capacity to inflict economic carnage on a vast scale. Our book seeks to establish a clear account of what happened during the crisis, why it happened, and what can be done to prevent another crisis from occurring.

We argue that the origins of the banking crisis can be gleaned from answering an obvious but rarely-posed question – Why did the financial and banking systems in the core economies of the US and UK implode, whilst the banking systems in other countries such as Australia and Canada, did not? Such comparisons provide a vital clue: banking crises, or their absence, we argue, are largely driven by the nature of the banking markets found in each country. We provide a detailed comparative analysis showing how, even within an apparently globalised financial system, the behaviour of individual banks has been shaped by nationally specific market contexts. We find that banking markets with high levels of bank competition that produce strong profit pressures on firms as well as low returns from traditional lending encourage risky forms of bank trading activities and leverage that are prone to produce financial crises. In the US and UK, highly competitive banking markets squeezed traditional lending and placed bankers under intense pressure to re-engineer their balance sheets in the search for additional profits, largely in highly leveraged mortgage-backed securities trading. The origins of the financial crisis can be traced back to losses in these markets in the US. It was the collapse of these markets that triggered the banking crisis which began in 2007. Such market structures and pressures were pronounced and strong in the US and UK, but weaker in the Australian and Canadian markets. This is why the latter banking systems did not implode.

It is ironic that the institutional and structural pressures that were to have such a devastating impact were largely created prior to the crisis by bankers and supportive state elites in the core financial markets. The key changes were part of a wider process of liberalisation and the increasing financialisation of core economies. There was a revolution in banking that propelled bankers and financiers towards new wealth and power. It was a period in which they were widely seen as Masters of the Universe. Once the crisis was triggered however, bankers were quickly overwhelmed by forces they had not anticipated and could not control. They were thus revealed also as Slaves of the Markets; conditioned and then overwhelmed by forces they had helped create.

Our approach allows us to isolate key drivers of the origins and scale of the crisis from the long list of causal factors produced in many accounts. It is true that plentiful credit, imprudent mortgage lending, the collapse of the US housing market, and lax bank regulation were a part of the story. But these were not the primary factors that actually drove banks and the behaviour of bankers. Regulation, for example, was largely permissive; it allowed but did not fundamentally drive bankers in the direction they took, especially in pursuing trading and massive leverage structures. Market dynamics were far more central in shaping what bankers did. Our analysis thus distinguishes between more fundamental causal factors such as market dynamics and those that were merely permissive. We point to the impacts of banking liberalisation and ‘financialisation’, especially the rise of intense market competition in recent decades, the associated decline in traditional banking as markets were squeezed, the rise of new attractive trading opportunities, and the build-up of debt and system complexity and risk in the core markets.

What explains the other form of variation we observe? Why didn’t the large Australian and Canadian banks join the party and crash? We can show that the nature of banking markets and the intensity of competition between the largest banks were an important cause of the crisis because different types of market shaped different forms of banking behaviour across countries. This national variation is something that is often overlooked within existing accounts of the crisis. Banks in Australia and Canada largely avoided trading in ‘toxic’ securities not because of tight prudential regulation or oversight in this arena but because they were operating in different kinds of markets, especially in relation to the level of competitive pressure and the nature of profit opportunities. These markets were structured by public policies that controlled competition and embedded an oligopoly that shielded the large banks from takeover pressure. These banks also mostly had a traditional rather than investment banking culture. In the markets they occupied, these bankers could make high profits through traditional lending practices. They thus avoided the fate of most of the bankers in the core US and UK markets.