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Bagehot was a Shadow Banker: Shadow Banking, Central Banking, and the Future of Global Finance

20 Pages Posted: 12 Mar 2013 Last revised: 6 Nov 2013

Perry Mehrling

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Zoltan Pozsar

Credit Suisse; Shadow Banking Colloquium (INET)

James Sweeney

Credit Suisse

Daniel H. Neilson

Bard College at Simon's Rock

Date Written: November 5, 2013

Abstract

At the heart of both the modern shadow banking system and the 19th century banking system described by Walter Bagehot is the wholesale money market, with the central bank providing a liquidity backstop. We characterize shadow banking as “money market funding of capital market lending” and construct a model of such a system with dealers making markets and setting prices for funding and risk. Using this model, we describe the secular expansion of the market-based credit system and its rapid collapse during the global financial crisis. The model also clarifies the economic functions of the market-based credit system, the role of the central bank in such a system, and the global character of US dollar funding markets.

Keywords: shadow banking, central banking

JEL Classification: E58, E44, F33

Suggested Citation

Mehrling, Perry and Pozsar, Zoltan and Sweeney, James and Neilson, Daniel H., Bagehot was a Shadow Banker: Shadow Banking, Central Banking, and the Future of Global Finance (November 5, 2013). Available at SSRN: https://ssrn.com/abstract=2232016 or http://dx.doi.org/10.2139/ssrn.2232016

Perry Mehrling

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

Zoltan Pozsar

Shadow Banking Colloquium (INET) ( email )

300 Park Avenue South, 5th Floor
New York, NY 10010
United States

Credit Suisse ( email )

Eleven Madison Avenue
New York, E14 4QJ
United States

James Sweeney

Credit Suisse ( email )

Kalanderplatz 1
Zurich, 8070
Switzerland

Daniel H. Neilson (Contact Author)

Bard College at Simon's Rock ( email )

84 Alford Road
Great Barrington, MA Massachusetts 01230
United States
+1 413 274 4033 (Phone)

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