- ‘Re-assessing Fragmentation of the Euro Area Banking System. Offshore Channels for Cross-Border Banking Activities’ (with Iñaki Aldasoro and Torsten Ehlers)
It is an established assessment that since the Eurocrisis, the Euro area banking system has been fragmented. Representing the Eurozone’s monetary architecture as a web of interlocking balance sheets, we carve out four different types of fragmentation that pertain to different parts of banks’ balance sheets and a different set of counterparties. The first type affects the size, scope, and business model of EA banks; the second the cross-border interbank lending among EA banks; the third the monetary policy transmission via EA banks; and the fourth the harmonization of public backstops for EA banks. We argue that the first two types of fragmentation can in principle be mitigated by using ‘offshore channels’ for cross-border banking activities. Euro area banks are not restricted to using EUR-denominated instruments inside the Eurozone monetary jurisdiction but may carry out cross-border activities in other units of account than the EUR (notably the USD) and in other booking locations (notably via their branches in the United Kingdom and the United States). Using data derived from the BIS’s international debt securities and locational banking statistics, we analyse whether the use of these offshore channels warrants a re-assessment of established findings on the fragmentation of the Euro area banking system.
- ‘After the Allocation. What Role for the Special Drawing Rights System?’ (with Fabian Pape and Tobias Pforr)
In August 2021, the IMF made a new SDR allocation to help ease pandemic-induced financial strains in the Global South. This article assesses the potential of the SDR system to address debt-related problems in global finance. We analyze the SDR system as a web of interlocking balance sheets whose members can use SDR holdings—the system’s tradable assets—for conversion into usable currency as a perpetual low-interest loan or to make payments to each other. Using original IMF data, we study how the system has been practically used since 1990. Though widely perceived as a solution in search of a problem in the post-Bretton Woods era, we find that the SDR system provides three mechanisms through which IMF members borrow and lend usable currency to each other, with different strings attached: first, transactions by agreement; second, the IMF’s core lending facilities for which the SDR system offers additional resources; and third, IMF-sponsored Trusts which seek to harness the SDR system for development purposes and are the basis for the current idea of ‘voluntary channeling’. Overall, given the SDR system’s idiosyncratic accounting rules, the new allocation can improve states’ liquidity conditions, albeit less than commonly claimed, but cannot address solvency issues.
Presentations at the 13th Critical Finance Studies conference (09/2021) and the Warwick Critical Finance Manuscript Development Workshop 3.0 (09/2021)
- ‘Monetary Architecture and the Green Transition’ (with Andrei Guter-Sandu and Armin Haas)
How to finance the Green Transition towards net-zero carbon emissions remains an open question. The literature either operates within a market-failure paradigm that calls for a Pigou tax to help markets correct themselves, or via war finance analogies that offer a ‘triad’ of state intervention possibilities: taxation, treasury borrowing, and central bank money creation. These frameworks often lack a thorough conceptualisation of endogenous credit money creation, for instance when resorting to loanable funds theory, and disregard the systemic and procedural dimensions of financing the Green Transition. We propose that ‘monetary architecture’, which perceives the monetary and financial system as a constantly evolving and historically specific hierarchical web of interlocking balance sheets, offers a more comprehensive framework to conceptualize the systemic and procedural financing challenges. Using the US as an example, we draw implications of a systemic financing view while considering a division of labor between ‘firefighting’ institutions such as the Federal Reserve and the Treasury, and ‘workhorse’ institutions such as off-balance-sheet fiscal agencies, commercial banks, and shadow banks. We argue further that financing the Green Transition must undergo three ideal-typical phases—initial balance sheet expansion, long-term funding, and possibly final contraction—that require diligent macro-financial management to avoid financial instability.
Presentations at the EAEPE online conference (09/2021) and the research seminar of the Department of International Politics at City, University of London (12/2021)
- ‘Primary Dealers in the Offshore US-Dollar System. Intermediating Treasury and Central Bank Balance Sheets’ (with Will Bateman)
This study analyzes the Primary Dealer model for the issuance and distribution of sovereign debt as a distinctive feature of today’s international monetary system, the Offshore US-Dollar System. Primary dealers are a group of private banks who have an oligopoly for purchasing sovereign debt on the primary market. Hence, not only do they form a transmission belt between central banks and treasuries, but they also control the distribution of sovereign debt within and across monetary jurisdictions, which is particularly relevant for sovereign debt with safe asset status that is in high demand, such as US and German bills and bonds. We argue that the Primary Dealer model is a historically specific and idiosyncratic institutional solution that originated in the US and by now has been adopted with only limited variation by most monetary jurisdictions around the globe. Combining institutionalist, legal and quantitative analysis of sovereign bond issuance, this study presents an in-depth analysis of the triangular structure between primary dealers, treasuries and central banks that exists in four quintessential cases: the United States, the United Kingdom, Japan, as well as Germany and the Eurozone.
Will Bateman, Australian National University
- ‘Transformation of the Eurozone Architecture. On Crises and Institutional Change in the Offshore US-Dollar System’
This study adopts a dynamic perspective on the transformation of the Eurozone architecture, using the macro-financial model developed in Murau (2020) as conceptual framework. It analyzes changes in the web of hierarchical interlocking balance sheets in four transition phases: the preparatory stages leading up to 1999 when the Eurozone 1.0 became effective; the 2009-12 Eurocrisis; the post-crisis reform in the Eurozone 2.0; and the transition towards a Eurozone 3.0 starting with the Covid-19 crisis in March 2020.
Within the logic of the macro-financial model, the study describes the changes that have taken place in the Eurozone during each of the transition periods. This refers to institutions, instruments and elasticity space in all four segments of the monetary architecture—central banking, commercial banking, non-bank financial institutions, as well as the fiscal ecosystem. This descriptive aspect of the transformation is expressed via changes in the structure of interlocking balance sheets. On that basis, the study will ask what the causal forces were that induced those changes. For each of the transition
phases, the study depicts four possible agents of change: (a) policymakers as agents of the state with a clearly delineable democratic legitimation; (b) technocratic actors; (c) representative of corporate interest; or (d) endogenous dynamics within the credit money system.
The key intellectual interest of this study lies in the question to which extent the modern credit money system on its own is causing the transformation of itself. Murau (2017) has argued that there is an endogenous tendency of credit money systems to transform due to the possibility of creating money out of nothing. The framework of hierarchical interlocking balance sheets, which this macro-financial model provides, allows to further spell out this idea.