Capital and income financialization: Accounting for the 2008 financial crisis

Financialization is recognised as a key feature of the 2008 financial crisis. We argue that a lesson is the need for an accounting framework which focuses upon financialization allowing it to be monitored and controlled by stakeholders. We argue that financialization has been permitted through the failure of accounting to distinguish distributable income from capital gains/transfers and to distinguish productive from speculative capital. We introduce an accounting presentation (4S accounting) which effectively makes these distinctions. We use a stylized example to illustrate how it should be applied to the financial reporting of banks.

► The 2008 financial crisis is associated with financialization.
► Currently accounting is permissive of financialization.
► A new framework for accounting is designed to signal financialization.
► Important for bank stakeholders including regulators.