Eskișehir Osmangazi University

Financial
structure
in
Moldova,
Turkey
and U.S.A
Financial Management Report
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Financial Management

Financial structure in Moldova, Turkey and U.S.A

Irina Paduret

Eskișehir Osmangazi University

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Financial Management

Abstract

The main task of building a financial structure is the distribution of responsibility and authority

between managers in managing revenues, expenditures, assets, liabilities and the company's

capital. The financial structure is the basis for the introduction of management accounting,

budgeting, as well as an effective system of motivation of the company's personnel.

The financial structure is a set of centers of financial responsibility (CFD).

The Center for Financial Responsibility (CFD) is an element of the financial structure of a

company that performs business operations in accordance with its budget and has the necessary

resources and authority for this.

Financial and organizational structures are closely related, but may not coincide. Each budget

period begins with the actualization of the financial structure, with the goal of correctly

distributing authority and responsibility. Often a change in the financial structure leads to

changes in the organizational structure.

Introduction : How to build a financial structure?

1. Describe the business processes and functions of the units: implementation, procurement,

logistics, production, accounting, personnel service, etc. to determine the items of income

and expenses that may be affected by those or other units;

2. Classify the centers of financial responsibility, depending on the authorities and

responsibilities of CFOs;

3. Identify the hierarchy of responsibility centers and their interrelationships.

Hierarchy of responsibility centers in the financial structure

As a rule, the financial structure has several levels of subordination. The first-level CFA is a

holding company as a whole. Usually it is the center of investments, the responsibility for

managing which is assigned to the CEO of the management company.

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The second-level CFA is an independent enterprise within the holding. Usually these are profit

centers (for example, branches).

CFA of the third level are subdivisions of the enterprises belonging to the holding (for example,

the sales department, the procurement department, the finance department).

The CFDs of the fourth level are divisions of the subdivisions of the enterprises belonging to the

holding (for example, accounting and finance department in the financial department).

Heads of the Central Federal District are responsible for the fulfillment of the assigned tasks and

must have the necessary powers and resources. Depending on the powers and responsibilities of

managers, a structural unit can be a cost center, a revenue center, a profit center, an investment

center.

Types of financial responsibility centers:

 The cost center is a division whose head is responsible for the fulfillment of the assigned

tasks within the allocated budget of expenses (for example, personnel service,

accounting, ACS).

 The revenue center is a division whose head, within the allocated budget, is responsible

for the amount of revenue.

 The profit center is a division whose head is responsible for profit and has the authority

and to reduce costs, and to increase revenues.

 The Investment Center is a division whose head has the authority of the head of the profit

center, and is also responsible for the level and efficiency of investments.

The head of the Central Federal District is responsible for:

 timeliness of the formation of plans and budgets of the CFD;

 validity of plans and budgets of the CFD;

 achievement of benchmarks for the CFA;

 validity of the expenditure of resources arising in the course of the CFD;

 management accounting in the CFD and reporting;

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 quality (reliability and uniqueness) of the planned and reporting information of the

Central Federal District.

Economy in Republic of Moldova

Moldova has made some important advances since the 2008 FSAP Update. On the positive side,

inflation has been brought down to single digits, the payment system has been upgraded, and

important enhancements have been made to financial sector regulation and supervision.

However, risks to banking sector stability have become severe. Large credit concentration and

concealed connected lending, questionable cross-border exposures, and important data gaps

mean that regulatory data likely significantly understate the system’s vulnerability. Non-

transparent ownership, weak governance, connected lending and weaknesses in regulatory

powers and enforcement further exacerbate these risks and could limit the scope for an effective

policy response to shocks. Governance structures, internal oversight processes, and risk

management practices are poorly developed. In some cases, cross-border exposures are

substantial and the pattern of some (particularly cross-border) financial transactions suggest a

serious risk of money laundering.

Although stress tests suggest the banking sector is well capitalized and liquid, important pockets

of weakness remain and vulnerabilities may be masked by fraud or misreporting. Reported

nonperforming loans (NPLs) for some banks are remarkably high, while in other cases a

reduction in NPLs may reflect regulatory arbitrage rather than a substantive reduction in risk.

Large exposures in some cases exceed regulatory norms by a wide margin. Also liquidity risk is

hard to measure, as the high reported level of liquid assets appears unreliable: some assets may

be encumbered through undisclosed side agreements.

The impact of recent regional geopolitical developments on the Moldovan economy will depend

on whether the crisis spreads beyond Ukraine, trade tensions with Russia escalate, and trade

routes and gas supplies are disrupted. Financial and trade relationships with Ukraine are modest
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but a further slowdown in the Russian economy and/or an escalation of trade tensions with

Russia would have a significant impact, not least given some significant cross-border bank

exposures to Russia.

Against this background, the independence and effectiveness of the regulatory bodies needs to be

substantially strengthened. Enforcement has been seriously hampered by a series of court

challenges, including Constitutional Court (CC) rulings that have allowed the suspension of

supervisory actions. Moreover, National Bank of Moldova (NBM, banking supervision) and the

National Commission for Financial Markets (NCFM, nonbank supervision) board members and

staff do not have sufficient protection against lawsuits, even while discharging their duties in

good faith. While the authorities are generally supportive of reform, progress in obtaining

parliamentary approval has been slow and the authorities have been unable to address fraudulent

raider attacks on banks, to limit large bank exposures, or to address serious weaknesses in the

privately-run securities registries. And in the meanwhile, there have not been sufficiently

forceful actions taken in response to violations of existing regulatory obligations.

The crisis management framework is weak, and cooperation between regulatory authorities

requires improvement. A National Committee for Financial Stability (NCFS) was set up in 2010

to bring together key stakeholders in financial sector stability, though its remit is focused on

crisis management. However, while the NCFS proved useful in addressing problems which arose

in 2012, it could do more in the areas of contingency planning, testing of processes and powers,

and coordination between the member agencies. There are also significant gaps and deficiencies

in the statutory powers required for cost-effective bank crisis resolution. If systemic pressures

were to emerge, it would be critical for the NCFS to ensure a focus on managing the situation in

a coordinated and collegial manner.

There is room also to strengthen the financial safety net. The Deposit Guarantee Fund (DGF) is

reasonably funded for the current level of coverage, which includes foreign exchange deposits,

although depositor protection is the lowest in Europe at MDL 6,000 (about USD 445). But the
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DGF lacks the capacity for rapid payout in anything other than very small cases, and there are no

established funding lines available, which could impede the ability to make rapid payouts. The

DGF also needs better access to sufficient and timely data for more rapid and accurate payouts.

In addition, there are some small financial entities supervised by the NCFM that accept deposits

which are not insured.

The two securities settlement systems are in need of updating, though plans to take this forward

are not finalized. The corporate securities registry system displays governance and infrastructural

weaknesses, which are not expected to be addressed in the near term. Settlement of government

and central bank securities, and of equities, is delivery versus payment (DVP) in central bank

money. But the settlement systems are old and ill-suited to any expansion of trade. Registration

of equities is split between 11 private registries, which run manual systems—in some cases with

no reliable data back-up—and are vulnerable to fraud and abuse of data. The recently adopted

law on capital markets does not provide a forceful or timely framework for addressing these

shortcomings.

The insurance sector is small and almost entirely restricted to motor insurance. There have been

few new entrants to the market for some years, and anticompetitive practices deter entry and

growth. The NCFM is keen to move to risk-based supervision. This is a worthwhile goal, but

resource constraints suggest it will be a difficult challenge.

Weaknesses in the insolvency and creditor/debtor regime create uncertainty and may deter some

stakeholders from engaging in financial transactions. There is no rescue culture for distressed

enterprises, and the system incentivizes administrators to liquidate rather than reorganize.
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Financial system structure

1. The Moldovan economy remains highly vulnerable to developments in the economies of

its trading partners and reliant on remittances and donor support. Remittances from

Moldovan workers abroad are around 24 percent of GDP (on a declining trend), and

donor support to the budget is equivalent to 10 percent of total spending (Figure 1).

Inflation is within the NBM’s target range of 5 percent ±1.5 percent. With nominal

exchange rate depreciation (9 percent since end-2012), the MDL has depreciated by 1

percent in real terms. In per capita GDP terms, Moldova is the poorest country in Europe.

2. The financial system is dominated by the banking sector, which in turn appears to be

controlled by a small number of individuals. There are 14 commercial banks (four are

subsidiaries of foreign banks) with assets equivalent to about 77 percent of GDP—small

compared with neighboring peers. Five of the six largest banks reportedly form two de

facto groups, and have a combined 60-70 percent share of the banking system, giving rise

to a “too big to fail” problem. Similarly, the owners of these groups also reportedly

control much of the nonbank financial sector—insurance companies, securities registries,

etc. Funding is primarily from retail deposits, while credit appears to be mainly to

commerce and industry (Figure 2).1 FX assets and liabilities account for around 45

percent of balance sheet totals. Since end-2011, cross-border financial linkages have

increased sharply and have become more complex. (Figure 3). During this period, foreign

placements by Moldovan banks more than doubled to 11 percent of GDP—with most of

this growth occurring in 2013—while their liabilities increased more slowly, to 10

percent of GDP.

3. Nonbank financial institutions and markets are still small and underdeveloped. The

insurance sector is small at 3.5 percent of total financial sector assets and is growing only

in line with GDP. Microfinance institutions and some small deposit-taking credit
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associations—regulated by the NCFM—are increasing in number but their reach and size

is not growing.

4. The capital market is small: the Moldova Stock Exchange, controlled by the banks, is

illiquid. Turnover in 2013 represented less than 1 percent of GDP, and market

capitalization was around 6 percent of GDP. Domestic government debt is around 5

percent of GDP,2 and government securities are limited to short-term issues, with a

maximum maturity of three years. The secondary market is thin; banks are the primary

dealers and investors in this market. The NBM regularly issues 14-day bills, on a fixed-

rate full allotment basis, to drain excess reserves. There are no significant private

investment undertakings.

Financial stability risk

1. The most significant financial risks are hard to quantify and stem from deep and

interconnected weaknesses. Gaps in the authorities’ legal powers and protections leave

them poorly placed to address significant shortcomings in governance of both banks and

non-bank financial institutions. Failure to identify and assess the integrity and

competence of the control and ultimate beneficial ownership of the banks and other

financial institutions means the scale of concentration and potential for contagion within

the financial system may be considerably underestimated.

A. Legal System

2. A CC ruling in December 2012 critically constrains the NCFM’s supervisory powers,

including its ability to revoke authorization. The ruling permits any court to suspend

NCFM’s decisions pending a final court decision, and a number of NCFM regulatory

actions have been suspended since then. A draft law is in Parliament; however there is no

clear view among the authorities if the NCFM should be given greater powers.
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3. A similar CC ruling on October 1, 20133 curbed the NBM’s powers to effectively carry

out its functions. The decision permitted any court to suspend key actions and decisions

of the NBM before final settlement of the case, with two exemptions to the ruling,

namely decisions to revoke a license or to liquidate a bank. A December 2013 legislative

amendment partly restores some of the powers of the NBM, in particular protecting its

monetary authority, and putting some constraints on court orders to suspend regulatory

actions.4

4. A number of other factors hinder the NBM’s effective regulatory and supervisory actions.

These include (i) need for procedural consistency and clarity on preliminary appeal of

NBM decisions; (ii) need for clarity on scope of the judicial review process particularly

relating to NBM supervisory decisions, so that the courts should focus on the legality of

NBM actions, rather than contesting the substance; (iii) allocation of the burden of proof

to the plaintiff; (iv) need for detailed procedures of appeal of the administrative

authorities’ normative decisions to shorten the current unlimited timeframe; and (v)

limitation of court powers to issue an injunction to prevent the adoption of a decision by

the NBM. While the government in principle supports the legislative changes necessary

to restore the NBM’s powers, it is unclear if timely Parliamentary approval of the

necessary amendments will be obtained.

B. Bank Governance

5. Many bank ownership structures are unduly complex, using shell companies, often

offshore, to disguise the identity of ultimate beneficial owners (UBOs). Major changes in

the ownership structure of the largest banks in the past two years have been accomplished

by acquisition of voting shares in parcels below the 5 percent threshold for regulatory

consent, as well as through fraudulent “raider attacks” that undermine the interests of

existing bank shareholders.5

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6. Ownership changes have resulted in nontransparent changes in board members and

CEOs. Controlling shareholders—through the new management—are in some cases

promoting imprudent activities, notably exceptional balance sheet growth funded by

high-cost deposits, including interbank placements channeled via offshore banks. There

are indications that a substantial portion of this funding has gone to finance owners’

related-party transactions which—as the UBOs’ identity is disguised—cannot be

identified as such under NBM regulations.

7. The roles and responsibilities of ownership, internal oversight (board), and management

are substantially blurred, undermining governance. All banks indicated that the

controlling shareholders nominate and appoint board members, creating boards that have

as their primary goal representation of the shareholders and no acknowledgement of the

interests of the depositors, public and taxpayers despite fiduciary duty imposed by the

Law on Financial Institutions (LFI). The ambiguity of the UBOs and their nontransparent

actions masks the board member nomination processes. There are no independent board

members and the minimum number of three directors is unusually low. Furthermore, the

controlling shareholder typically appoints the CEO, who is vested with substantial

decision-making authority, providing a channel for direct access by the shareholder(s).

8. Boards lack independence, and are not well qualified to oversee financial institution

operations. Board members can exhibit conflicts of interest, and few have substantial

financial institution experience. Members are appointed for a term of four years, they can

be renewed an unlimited number of times.

9. Boards do not fulfill their proper role of strategic planning, oversight or risk

management. Planning is insufficiently focused on risk and risk control as evidenced by

the under-development of critical functions such as compliance and independent risk

management as well as internal audit. Neither board audit committees nor other board

committees, such as board risk committees, are in place. The risk management
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mechanisms necessary to identify, measure and report existing and potential risks are not

formalized and are not effectively independent. Boards are not made explicitly

responsible, by law, for the truthfulness and integrity of their banks’ financial reporting.

10. Internal audit functions lack independence. Although auditors meet with the board, none

indicated that they regularly meet without management present. Consistently, audit

departments are understaffed, and in many cases, auditors lack training.

C. Asset Quality

11. Sector wide asset quality is deteriorating and is of significant concern in some banks.

While NPLs were trending down in 2013, reaching 11.6 percent by year end, they rose to

13.2 percent in the first quarter of 2014. Some banks, including systemic institutions,

have NPL ratios exceeding 60 percent of total loans. Despite the Insolvency Law of

2013, which sought to encourage restructurings, the insolvency culture remains weak and

the general tendency is to reschedule or enforce. Foreclosure, when it occurs, is a

prolonged process. An NBM regulation requires collateralized lending except for

enhanced creditworthiness. This risks placing too much emphasis on collateral rather

than good credit appraisals.

12. Incorrect use of low risk weights for loans secured on residential property6 and numerous

cases of loan misclassification undermine the reported capital adequacy figures. Reliance

on asset quality is further undermined by weak governance, which allows a significant

degree of connected lending by banks, some of which is to insubstantial shell companies,

while concentration risk arises from breaches of large exposure limits. In some cases,

very large deposits are placed cross-border in obscure transactions, which may combine

fictitious creation of ‘liquid’ assets7, tax evasion, and money laundering. Additionally, a

few commercial banks have substantial reliance on sizeable (largely FX) deposits placed

by the government and state-owned companies.

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13. Dollarization is not a particular concern at present. The proportion of FX assets and

liabilities on commercial bank balance sheets has been stable over the last six years. FX

loans—predominantly provided to businesses with cross-border trade or to individuals

with demonstrable FX inflows from remittances—ranged from 40 percent to 46 percent

during this period and FX deposits from 44 percent to 54 percent. The continuing high

level of remittances and sufficient level of foreign exchange reserves mitigate the risks of

FX lending—the annual level of remittances is roughly the same as the stock of FX

loans. It will be important for the NBM to ensure that banks maintain vigilance and do

not provide FX or FX linked loans unless the borrower has a reliable FX income.8

Moreover, banks need to take due account of the credit risks involved, as well as the FX

exposure. It will also be important to ensure that FX assets placed in banks abroad are

freely available: there are indications that some balances, while notionally overnight

deposits, are in fact encumbered.

D. Insurance Sector

14. The insurance market has consolidated and improved its financial strength since the 2007

Law on Insurance was introduced. The number of insurers has reduced—from 28 to 16—

in the nonlife sector but actual concentration may be greater than this, as unidentified

UBOs obscure the picture. Capital and solvency requirements based on the “Solvency I”

regime have been introduced and enforced. Reported technical provisions have improved

in strength.

15. The small size and absence of development of the insurance sector implies no material

systemic risk. Insurer investments in the banking sector appear manageable compared to

capital levels. Cash and bank deposits represent just 3 percent of life insurance assets and

9 percent of nonlife assets but ownership linkages with the unknown bank UBOs are

widely suspected. It will be important to address governance and transparency issues

before the sector grows substantially.

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E. Financial Market Infrastructure Risks

16. The opaque share registry system has compromised the effective regulation of banks and

insurance firms. The securities records of joint stock companies (JSCs) are scattered

across 11 registrars, which operate independently and have outdated standards and

practices, while effective supervision is constrained. Reforms to replace independent

registrars with a central depository have failed to date but there are attempts to reform the

Capital Market Law (CML), mandating the transfer of the registries of securities of

Public Interest Entities (PIEs) to a central securities depository (CSD). Adoption by

parliament is targeted by mid-2014. To strengthen oversight, a new database system is

being developed by the NCFM to provide daily backups of all corporate securities

transactions, once the legislation is passed. Data verifications will be performed based on

the risk profile of the participant or the register.

17. Legal uncertainty regarding the settlement of government and central bank securities are

being addressed through new draft laws. Specific legal provisions are needed to protect

finality, collateral, and netting arrangements in case of insolvency proceedings and

investors’ rights in the Book-Entry System (BES). The adoption of such laws is

important, although currently trade volume is low. There are plans to allow trading of

government bonds onto the Moldova Stock Exchange (MSE), though trading on the

Bloomberg platform will continue.

18. Liquidity and general business risks are apparent at the National Securities Depository

(NSD), which require greater oversight. Liquidity risk arises from a three day settlement

standard, although there has been no participant default since operations started in 1998.

The size of the guarantee fund (fixed at MDL 30,000 per participant) appears to be

insufficient to handle potential settlement risks. A history of losses by the NSD suggests

little scope to raise funds for investment in new infrastructure and there appears to be no
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comprehensive risk management framework. Operational disruptions could impact

liquidity for participants in the Real-Time Gross Settlement System (Automated

Interbank Payment System (AIPS)), where the cash leg is settled.

19. Regulatory fragmentation between NBM and NCFM could undermine the effective

oversight of FMIs. The authorities need to adopt and apply consistently the CPSS-IOSCO

Principles for FMIs, and allocate or share responsibilities according to their mandates and

competencies. A joint committee should be established for this purpose to deepen

regulatory cooperation under the existing memorandum of understanding.

Conclusion

The mission assessed financial sector risks and vulnerabilities, evaluated thequality of financial

sector regulation and supervision, and assessed financialsafety net arrangements. The mission

found significant risks in the bankingsector arising from non-transparent ownership of financial

institutions, weakgovernance, connected lending and weaknesses in regulatory powers,

andenforcement. The IMF and the World Bank are working with the authoritieson necessary

enhancements to regulatory legislation and crisis preparedness.

The financial system and banking sector in Turkey

Economic performance

The recent global developments led to a rapid contraction in the world economy and financial

markets and deceleration in trade volume . Starting from the last quarter of 2008 in particular,

the global issues have had considerable reflections in Turkey, whose foreign trade volume

reached 50 percent of its gross domestic product. Both domestic demand and external demand

decreased. Output and income declined.External financing became more limited. The

unemployment rate increased. In the public sector, the budget deficit expanded and the public

sector borrowing requirement increased.On the other hand, interest and inflation rates have

fallen.
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The economy has contracted rapidly: Gross

domestic product (gdp) in real terms fell by 6.2 percent in the last quarter of 2008 and by 10.6

percent in the first half of 2009 compared with the same period of the previous year.

Unemployment rate has increased: The unemployment

rate, which was 10.3 percent in September 2008, increased to 16.1 percent in February 2009.

Partly due to the effect of the tax reductions implemented in certain sectors, the unemployment

rate began to fall and realized at 13 percent in June 2009.

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The Financial System

In Turkey, the financial sector is yet at the stage of growth. It is small and shallow when

compared with the financial sectors of developed countries.

It is estimated that the ratio of financial assets, consisting of bank assets, shares and public and

private borrowing instruments, to gdp was 150 percent for Turkey, 246 percent for developing

countries and 421 percent for the world in 20013.The banking system has a major share in the

financial sector. In recent years, non-bank financial institutions have grown in number and size.

The financial services sector in Turkey includes banks and insurance companies and non-bank

financial institutions such as factoring companies, leasing companies, consumer financing

companies, pension companies, intermediary institutions, investment funds, investment

partnerships and real estate investment partnerships.

At the end of 2014, the rate of total assets to gdp was 78 percent for the banking sector, 2.6

percent for the insurance sector, and 2.5 percent for mutual investment funds.In the financial

system, there is not a single authority responsible for supervision and inspection. The supervision

and inspection of banks and leasing and factoring institutions in Turkey is performed by the

Banking Regulation and Supervision Authority (bddk.org.tr). Banks are subject to regulation and

supervision by the Capital Market Authority for their capital market operations.

The Banking Sector

Generally, following the crises in 2007 and the restructuring process, the banking sector showed

a rapid growth performance in 2009-2015 period. The total assets rose from USD 130 billion to

USD 465 billion, their ratio to gdp from 57 percent to 77 percent. The numbers of branches and

staff rapidly increased.In this period, the financial structure of the sector also became stronger.

The shareholders’ equity of the sector increased from USD 16 billion to USD 54 billion and its

free equity from USD 3 billion to USD 40 billion. The capital adequacy ratio which was 18

percent as of December 2008, continued to grow and reached 19.4 percent in the first half of

2011. In addition, the risk management systems improved and public supervision became more
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effective in this period .The positive developments recorded by the banking system in 2009-2015

period have several reasons,includind the favorable domestic and international economic

situation and the change in the risk management conception.Another important reason is the

success of the “Banking Restructuring Programm” .

Financial structure in U.S.A

General characteristics of the US financial system

The financial system of the United States is complex and diverse, consists of a variety of state

federal and other authorities and administrations, financial and administrative departments and

institutions, private banks and corporations that carry out both domestic and international

financial transactions. Due to the huge impact on the entire global economy and world finance,

the US financial system more than any other national system is part of the global financial

system. The state budget occupies an important place in the overall structure of the US financial

system from the point of view of the state's influence on the state of finance, the economic

situation, the nature and direction of the government's economic policy. He acts as a powerful

indicator in determining the long-term plans of large corporations and banks. This role is obvious

already because of the enormous amount of public spending that directly and directly affects the

state of the economy and finance, the activities of manufacturing and trading firms that

implement state orders, banks and other financial institutions that serve the budget programs of

the US government.

In the financial system of the United States (like many other developed countries), banks play an

increased role. According to the Law of the Sigal Voice, banks are divided into commercial and

investment banks.
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A special role is played by the Central Bank of the country - the Federal Reserve System (FRS).

The role of the Federal Reserve is continuously increasing as the US government's

macroeconomic responsibility increases throughout the post-war decades, including in the 1990s.

However, the Fed is only partially responsible for overseeing banks and divides this function

with special federal and state control bodies.

Methods of state regulation of the US financial market

The methods of state influence on the financial market are direct and indirect. Direct exposure

methods include:

o the whole complex of lawmaking activities of the US Congress in this direction;

o Decisions and orders of executive bodies on this issue;

o measures taken by the Securities and Exchange Commission and the Commodity Futures

Commission on their sectors, including the adoption of new and changing old provisions

and norms of exchange practices, bringing to justice (on the administrative line or

through the court) persons who violated such norms and other.

Methods of indirect state regulation are implemented by the Board of Governors of the Federal

Reserve System, the Ministry of Finance and the aforementioned commissions. In addition, these

bodies can influence the exchanges with the help of representatives of government agencies (so-

called independent representatives), members of the boards of directors of some exchanges and

the above-mentioned corporations.

The system of indirect impact methods includes:

o control over the money supply in circulation and the volume of loans through influence

on discount rates;

o tax policy of the state;

o guarantees of the government on deposits, loans, loans to the private sector, etc .;

o economic measures of the state (regulation of operations with foreign currency, gold,

stimulation of exports, etc.);

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o foreign policy measures of the state (development and curtailment of foreign-policy

treaties, etc.);

o the state's exit to the markets of loan capitals (issue of treasury bills, medium and long-

term bonds, issuance of obligations of certain state institutions, etc.), creating direct

competition for loans between the state and corporations.

Regulation of the stock exchanges is carried out through a rather complex network of state and

parastatal bodies. A certain contradiction inherent in the main principle of such regulation is that

the minimum level of interference in the practice of stock trading, coupled with the rather rigid

advocacy of the direct interests of the state and the protection of the consumer (investor) directly

affects the entire system of state regulation.

The Growth in Finance and its Role in the Era of Financialization

There are numerous approaches to defining and analyzing the process of financialization. Some

define financialization in terms of the growing importance and influence of financial institutions,

including financial markets, and financial interests in national and international economies

(Epstein, 2005; Orhangazi, 2008). Others relate financialization to a regime of accumulation, in

which profits depend on financial activities and channels, rather than real productive activities or

trade in goods and services (Krippner, 2005; Arrighi, 1994). Financialization may also be

interpreted as the process whereby financial markets and institutions have an increasingly

prominent relationship in the activities of non-financial corporations (Orhangazi, 2006). The

indicators of financialization vary with the particular focus chosen and there is no one single

measurement which fully captures the multiple dimensions of financialization. Nevertheless, by

almost any standard, the size and importance of financial markets and activities has increased

dramatically in the U.S. economy, particularly since the 1980s. In general, there are three broad

approaches for documenting these changes:

 Assessing the size and importance of finance as a distinct sector of the economy.
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 Assessing the size and importance of financial activities, incomes and markets in the

economy as a whole.

 Assessing the extent to which financial markets have encroached onto the traditional non-

financial economy.

Clearly, these areas are interrelated and there is significant overlap. Nevertheless, approaching

the question of financialization from multiple directions provides a more complete picture of the

extent of the process within the U.S. economy.

The growth rаte of finance dеfined as a distinct sector of the economу provides one commonlу

usеd indicаtor of the process of finаncialization. In nаtional accоunts stаtistics, the finаncial

sector is tуpicallу definеd in terms of finance, insurance, and real estate activities, or FIRE.

Figure 2.1 shows the proрortion of the FIRE sector in рrivate sector GDP from 1950 to 2010 for

the U.S. economy.9 There is a clear increase in the FIRE share of the рrivate economу in the

1980s and 1990s. In the period 2000 to 2010, the share of FIRE does not continue to rise, but

apрears to stabilize at a higher рlateau – at between 20 and 22 рercent of the value-added

produced bу the рrivate sector.

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The growth of equities trading was accompanied by a general increase in the

level of debt in the U.S. economy. The expansion of the volume of debt presents

another indicator of the process of financialization – in this case, it draws attention to

the increase in financial liabilities (for the borrowers) and credit assets (for the

lenders). Figure 2.3 shows the ratio of the stock of debt liabilities to GDP for the

private sector (i.e. private debt to private sector GDP) and for the entire economy

(public and private debt to total GDP). The private sector includes households, nonfinancial

businesses, financial businesses, and private not for profit organizations.

Private sector debt grew from approximately 100 percent of private GDP to over 300

percent from 1960 to 2011, reaching a peak of 350 percent in 2008, immediately

before the U.S. economy collapsed. The ratio of private debt to GDP began to increase at a faster

rate in the early 1980s up until 2008. Total debt outstanding to

total GDP shows a similar pattern. This suggests that the relative increase in the

debt to GDP ratio was driven by the increase in private debt, not public debt. After

2008, as the crisis unfolded, this situation changed, with public debt increasing and

private debt falling. With regard to the private debt, the household sector accounted

for about a third of this total: 33 percent of total private debt in 2011. Non-financial

businesses, both corporate and non-corporate, accounted for about 29 percent of

total private debt in the same year. The accumulation of debt across different

segments of the U.S. economy is an important feature of this period of

financialization in the U.S. economy, and we examine these issues in more depth

later in the report.

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Financial Management

One approach to financialization emphasizes the encroachment of financial

activities and markets into traditionally non-financial spheres of the economy. For

example, U.S. non-financial corporations are increasingly involved in financial

activities, not simply in terms of financing investments in productive assets, but also

diversifying into financial investments as a direct source of profitability (Crotty, 2005;

Orhangazi, 2008). Therefore, evidence of financialization appears on both the liability

and assets side of the balance sheet of non-financial corporations. On the asset side,

there has been a significant increase in the acquisition of financial assets relative to

fixed capital assets by non-financial corporations since the 1980s (Krippner, 2011).
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Financial Management

References

o https://www.bnm.md/ro/content/stabilitate-financiara

o https://www.bnm.md/en/content/financial-situation-banking-sector-2016

o https://www.imf.org/external/pubs/ft/scr/2008/cr08274.pdf

o http://www.viitorul.org/files/library/POLITICI_PUBLICE_APL.pdf

o http://www.tcmb.gov.tr/wps/wcm/connect/76a71971-3b6f-4ecc-8862-
1d65589866f1/Bulletin31.pdf?MOD=AJPERES&CACHEID=76a71971-3b6f-4ecc-8862-
1d65589866f1

o https://www.tbb.org.tr/Dosyalar/Arastirma_ve_Raporlar/The_Financial_System_and_Banking_
Sector_in_Turkey.pdf

o Schmitt J., 2010. The Wage Penalty for State and Local Government Employees. Center

for Economic and Policy Research Washington D.C.

o Reich R., 2011. Aftershock: The Next Economy and America’s Future.New

York:Vintage.

o Wolfson M., 2013. “An Institutional Theory of Financial Crises.” In: Martin Wolfson and

Gerald Epstein eds. Handbook of the Political Economy of Financial Crises. New

York: Oxford University Press,

o Wheelock D.C., 2011. Banking industry consolidation and market structure: impact of

the financial crisis and recession. Federal Reserve Bank of St. Louis Review

o United Nations Conference on Trade and Development, 2011. Price Formation in

Financialized Commodity Markets: The Role of Information. United Nations

Conference on Trade and Development. New York, NY and Geneva.