Shadowbanking

Prof.DanielaGaborUWEBristol

Threepoints

1. amacrofinance approachtoshadowbanking

2. shadowmoneyandcredit

3. shadowbanking=financialisation ofdevelopment

1.Macrofinance

• Closeunderstandingoffinance

• balancesheets- money,credit,macroeconomicsofgrowth,poverty,inequality,financialcrises.

• shadowbanking=financialglobalisation

Anewstartingpoint

Financialglobalisation

• Financialsystemorganised aroundsecurities&derivativemarkets:– Businessmodelanchoredindailyvariationinpriceofsecurities:market-basedbanking

• Shadowbanking:pullinginstitutionalinvestorstoprovidefinancingviawholesalemoneymarkets

Bank- basedfinancialsystems

Securitiesmarkets-basedfinancialsystems

Securitiesmarkets

Wholesalemoneymarkets

Derivativemarkets

Loans Deposits

Interbankmoneymarket

Developmentstrategy

Socialcontractwiththestate

Investmentbanks(market-makers)

GlobalInstitutionalinvestors

Hedge/bondfunds

2.Shadowmoney

• Moneyinfinancialcapitalismisdifferenttomoneyinindustrialcapitalism

• ‘bankmoneyisdebtofbanks,broughtintobeingasbanksfinancebusiness’(Minsky,1967)

• shadowmoneyisdebtofsecuritiestraders(banks,assetmanagers,bondfunds,brokers)broughtintobeingtofinancesecurities,debtcollateralised bythoseverysecurities

Bankmoneyvs shadowmoney

Loans Deposits(M2)

Loans Bankmoney

Loans Deposits

SecuritiesShadowmoney

Assets AssetsLiabilities Liabilities

‘ShadowmoneybeginswhereM2ends’(Pozsar 2014)

Howisshadowmoneycreated– aquestionofmoneyness

Loans Deposits

Loans Bankmoney

Loans Deposits

SecuritiesShadowmoney

Moneyness – abilitytoconvertbankmoneyintocash atparondemand,andshadowmoneyintobankmoneyatparondemand

collateral

Securitiesmarkets

Repofinancing collateral=60

shortageoffunding=40

securitiesfallinmarketpricefrom100to60

Sellsecurities?firesales andlower

marketliquidity(liquidityspiral)

collateral=30

shortageoffunding=70

Corporatebondsfallinmarketpriceto40

Shadowmoneyissuedbyahedgefund

Bank- basedfinancialsystems

Securitiesmarkets-basedfinancialsystems

Securitiesmarkets

Wholesalemoneymarkets

Derivativemarkets

Loans Deposits

Interbankmoneymarket

Developmentstrategy

Socialcontractwiththestate

Investmentbanks(market-makers)

GlobalInstitutionalinvestors

Hedge/bondfunds

Thenewmacrofinance

ECB’sLOLRvs MMLR

3.ShadowbankinginDECs

Theageofassetmanagement

MaximisingFinanceforDevelopment

Shadow-bankingintoresilientmarket-basedfinance

LocalCurrencyBondMarketsInitiative

Portfolioflows(global)

institutionalinvestors

Securitisationmarkets

Liquid/ESGsecuritiesmarkets

Reengineerfinancialsystems

G20,WB,MDBs,EC

Infrastructureasanassetclass

China&financialglobalisation

INETgrantManagingShadowMoney

IMF2018:domesticfinancialconditionsdeterminedbyglobalfinancialcycle

ThedownsidesofMDBsnewfinancingmodel

• influence,ifnotaltogethershape,thetermsonwhichDECsjointheglobalsupplyofsecurities- hepreferencesofglobalbanksandglobalinstitutionalinvestors.

• MDBswillshapethedefinitionofwhatisa‘bankable’project -prioritiselargeinfrastructureprojectsattheexpenseofsmallerprojectswithmoredevelopmentalpotential.

• MDBsplantopioneerthesecuritisationinfrastructuresthatwilltransformbankableprojectsintotradablesecurities- significantrevenues&dominationforgloballysystemicfinancialinstitutions,

• MDBsco-designthe‘de-risking’/subsidiesmeasuresandpersuadingDECgovernmentstofinancetheassociatedcosts,asguarantorofprivatefinancialprofits.

• MDBsmaypushforDECpensionsystemstoconvergeontheUSmodelofprivatepensionsinordertocreatelocalinstitutionalinvestors dependentonglobalassetmanagers

Preparingbetterforthenextcrisis

• Managefinancialglobalisation:capitalcontrolsandmanagedexchangeratesforGlobalSouth

• Defendandrevivethewelfarestateifrentiers tobeeuthanised (FTT)

• Reclaimthedevelopmentalstate:politiciansreign,technocratsrule,businessescomply– highly-capable,development-orientedbureaucracyfocusedonproductivitygrowth&industrialupgrading