- ‘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.
- ‘Covid-19 and Macrofinancial Debt Crises. What Role for the Special Drawing Rights System?’ (with Fabian Pape and Tobias Pforr)
The Covid-19 pandemic has led to dramatic increases in government borrowing. The Institute of International Finance (IIF) has gone so far as to speak of an “attack of a debt tsunami”, as global debt increased by over USD 15 trillion by Q3 2020, hitting a new record of USD 272 trillion. Even though government borrowing rates have so far remained at historic lows for many countries, such developments are also a recipe for possible macroeconomic instabilities over the longer term. This opens the question of how such instabilities should be managed on the international stage and what role the IMF and its Special Drawing Rights (SDR) system can play in managing future macroeconomic stability.
In this article, we adopt the perspective of critical macro-finance and present an analysis of the real-world SDR system as a web of hierarchical interlocking balance sheets. The SDR system is a small payment community that comprises one institution of each IMF member state, called ‘participant’ (typically the central bank), the IMF General Department as well as prescribed holders, such as development banks and intergovernmental monetary institutions. We stress that the SDR system has an idiosyncratic accounting logic—the result of a French-American compromise made in the 1960s—which makes SDRs unlike any other financial instrument. The term SDR is effectively used to refer to three things: a unit of account (today defined as a currency basket), a non- tradeable liability of the participants (called SDR allocation), and an asset (called SDR holding) that is tradable within the SDR system. After the demise of the Bretton Woods System, the SDR system was long seen as a ‘solution in search of a problem’, with an unclear practical purpose.
Based on the analysis of original IMF data, we argue that the SDR system today has three different functions: First, it acts as a de-facto credit line for participants to borrow usable currency, predominantly USD, from other participants which can be obtained by selling SDR holdings. Second, it allows the IMF member states to pay contributions to the IMF General Department and to other prescribed holders. Third, it allows for those prescribed holders to ask for contributions in usable currency from IMF member states. Based on this analysis, we see the SDR system in its present form as serving a very minor and narrow role in the international monetary architecture. Given its accounting structure and functions, we caution against suggestions that this system can be used as a ready-made remedy against potential large scale solvency problems that may finally break out in the aftermath of the COVID-19 pandemic.
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)
There are several roadmaps for financing the Green Transition, but most scholars agree that debates have not yet yielded convincing results. The literature typically sketches out a ‘triad’: taxation, treasury borrowing, and central bank money creation. This framework has several shortcomings. It lacks a deep conceptualisation of credit money, does not gauge the monetary and financial system systemically, and disregards the processual dimension of financing. This paper addresses these shortcomings and puts forth a more comprehensive view of financing the Green Transition.
We perceive the monetary and financial system as a hierarchical web of interlocking balance sheets, and use the concept of ‘monetary architecture’ to describe historically specific formations. Each ‘monetary jurisdiction’ (e.g. Eurozone or US) is subdivided into four ‘segments’: central banks, commercial banks, non-bank financial institutions, and a fiscal ecosystem made up of treasuries and off-balance-sheet fiscal agencies. Each segment comprises ‘institutions’ with specific ‘elasticity space for balance sheet expansion needed to finance investment. We contend that monetary architectures as systems, not individual balance sheets, must mobilise elasticity space for financing the Green Transition. Using examples from the US and the Eurozone, we assess the interplay between these segments and their potential role in financing the Green Transition.
Presentations at the EAEPE online conference (09/2021)
- ‘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.