Abstract

Some scholars have labeled the financial structures that faced a run during the 2007-9 Financial Crisis as ‘shadow banking system’ and have connected it to the emergence of new monetary instruments. This was the starting point for thinking about various forms of private debt as ‘shadow money’. Since then several shadow money theories have emerged, with seemingly different conceptualizations of shadow money. We argue that, despite different terminology and intellectual ancestry, these theories generally agree on three key criteria that define shadow money. A financial instrument must be met by a demand that considers it an alternative to established forms of money, has to trade at par to higher-ranking forms of money and must be created through a swap of private debt certificates (IOUs). Based on these criteria, we look at four instruments to discuss how and under what conditions they correspond, or have corresponded, to those criteria. These are money market fund shares, overnight repurchase agreements, asset-backed commercial papers, and foreign exchange swaps. We show that the disagreement over what instruments to count as shadow money lies in the level of strictness in applying those criteria on real-world financial instruments. If we are mathematically strict, none of the instruments can be categorized as shadow money. If we allow for more empirical variation, then all of the instruments correspond to the definition.

How does shadow banking affect the monetary system? The FSB definition treats it as a ‘non-monetary phenomenon’. However, if we acknowledge that traditional banking involves autonomous money creation by banks (Werner 2016) and if we apply this insight on money to shadow banking, we may say that shadow banking also involves money creation. This has been the starting point for thinking about various forms of private debt as ‘shadow bank money’ or ‘shadow money’.

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Author(s)

Steffen Murau

Steffen Murau

Postdoctoral Fellow, Boston University

smurau@bu.edu
authors website
Steffen Murau is a postdoctoral fellow at the Global Development Policy (GDP) Center of Boston University, City Political Economy Research Centre (CITYPERC) of City, University of London, and institute for Advanced Sustainability Studies (IASS) in Potsdam. His research interests include monetary theory, shadow banking, the international monetary system, and the European Monetary Union. Among others, he has published in the Journal of Institutional Economics, the Review of International Political Economy, and the Journal of Common Market Studies.



Tobias Pforr

Tobias Pforr

Visiting Research Fellow, Warwick University

T.D.Pforr@warwick.ac.uk
authors website
Tobias Pforr is a postdoctoral fellow at the University of Reading and a Visiting Fellow at the University of Warwick. His research interests include monetary theory, development finance, and climate change adaptation. He has previous professional experience in banking and financial markets and has worked with a number of international organizations such as the UN World Food Program, the Red Cross Red CrescentSocieties, the German Red Cross, and the Overseas Development Institute.



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