Banca de DEFESA: CAROLINA REITERMAJER VIANA

THE INFLUENCE OF SHADOW BANKING ON THE ORGANIZATION OF MONEY MARKETS: WEAKNESS AND INSTABILITY IN A FINANCIAL SYSTEM GLOBALLY INTEGRATED

shadow banking; financial instability, financial system.

The shadow banking system comprises financial institutions that finance the lending of long-term assets by short-term money market funding. What grants this system its “shadowy” character is the lack of access to the central bank’s “lender of last resort” facilities or guaranteed deposits, as well as being subjected to fewer regulatory restrictions. Thus, they are in the shadows of the traditional banking system. In this study, we explore the interaction between central banks, traditional banks, and the shadow banking system. We highlight the way current money market dynamics act as sources of financial fragility and instability across the international financial system, regardless of the specific political economy path or institutional framework of each economy. Drawing on Minsky’s financial fragility hypothesis, we analyse the effects of the growing involvement of shadow banks in money markets, focusing on its implications for fiscal and monetary policy. The variegation seen across financial systems gives rise to specific forms of financial fragility, which in turn affect the role of states and central banks in ways that, albeit similar, modify the implementation of monetary and fiscal policy in a fundamentally different manner.