2019 | ‘Private Debt as Shadow Money? Conceptual Criteria, Empirical Evaluation and Implications for Financial Stability’ – Dr. Steffen Murau
Dr. Steffen Murau| steffenmurau.com

2019 | ‘Private Debt as Shadow Money? Conceptual Criteria, Empirical Evaluation and Implications for Financial Stability’

Following the 2007-9 Financial Crisis, scholars have come to perceive the financial structures that faced a run at the time as ‘shadow banking system’. According to this narrative, the shadow banking system does on series of different connected balance sheets what a classic commercial bank did on its own singular balance sheet. If we acknowledge that traditional banking involves autonomous money creation by banks and translate this new economic thinking about money to shadow banking as the mere continuation of traditional banking by other means, we arrive at the analytical position that shadow banking has to go along with money creation as well. This is the starting point for thinking about various forms of private debt as ‘shadow bank money’ or ‘shadow money’. Currently, there are several shadow money theories on the market for ideas; their conceptualizations of shadow money are partly competing, partly consistent. This paper suggests pinning down the shadow money concept to three decisive criteria: Shadow money must be created through a swap of private debt certificates (IOUs); it must be met by a demand that considers it an alternative to established forms of money; and is has to trade at par to higher-ranking forms of money. Based on these criteria, the paper looks at four instruments to discuss if and under which conditions they correspond, or have corresponded, to the category of shadow money. These are money market fund shares, overnight repurchase agreements, asset-backed commercial papers and foreign exchange swaps. Following up on this empirical evaluation, the paper discusses four potential ways for policy-makers concerned with financial stability questions to deal with shadow money. This reaches from a laissez-faire approach over the establishment of a public-private partnership to fully putting shadow money under public control or de-monetizing it. While each of these approaches has precedents in history, none of it is free from trade-offs regarding financial stability.

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