Daniela Gabor (UWE Bristol) speaks at the ESM

"Shadow money: rethinking money in market-based finance"

Abstract: Bank money arises from credit creation via relationship banking, funding assets held to maturity. In contrast, shadow money arises from credit creation via capital markets, funding securities continuously repriced in repo transactions. Drawing on Goodhart (1998), Mehrling et al (2013) and Pozsar (2014, 2015), the presentation first examines shadow moneyness, issuing institutions, endogeneity (central bank collateral framework/safe assets) and instability (collateral market liquidity). It then focuses on US and European shadow money to outline the temporality and politics of shadow money. Shadow money creates a double temporality, of cash and securities moving across the balance sheets of private and public institutions. It involves time along three dimensions: the time of state money (how the central bank orders time on its balance sheet), the time of securities dealers (the temporal demands of securities trading and settlement) and the time of shadow moneyness (continous collateral valuation). These interlocked dimensions are critical to understanding the US repo market. In turn, the politics resides in the design of the central bank’s GC collateral framework, since it sets the terms on which it accepts shadow money from counterparty banks. In tailoring these terms to the financial integration agenda, the ECB hoped to create a  ‘synthetic’ euroarea government bond and thus overcome the (political) flaws in the Euro monetary architecture. Yet by adopting the collateral valuation practices that underpin shadow moneyness, the ECB made the sovereign debt crisis worse. While the ‘whatever it takes’ promise stabilised European shadow money, the ECB’s crisis interventions suggest that the collateral framework of central banks needs a radical rethink.

Bio: Daniela Gabor is associate professor in economics at the University of the West of England, Bristol. She holds a PhD in banking and finance from the University of Stirling (2009). Since then, she has published on central banking in crisis, on the governance of global banks and the IMF, and on shadow banking and repo markets. Her latest publication is a co-edited book with Charles Goodhart, Jakob Vestegaard, and Ismail Erturk entitled Central Banking at Crossroads (Anthem Press, 2014).
 

This is an ESM research internal seminar. If you would like to attend, please write an email to ESMresearch@esm.europa.eu (link sends e-mail)