Politics, time and space in the era of shadow banking

ABSTRACT

In the wake of the Global Financial Crisis, there has been an understandable focus on the financial fragility and contagion aspects of shadow banking. This article argues that shadow banking is important for another set of reasons. It has been well established that shadow banking permits the transformation of assets and financial claims. It has also been established that fiscal and regulatory arbitrage occurs through shadow banking, and associated offshore financial activities. The article develops the argument that together these are transforming the times and spaces of modern finance, and directly challenging earlier spatio-temporal concepts of finance, and the regulatory/jurisdictional order built on them. The article suggests that the longer term significance of shadow banking may not just be its role in financial crisis, or even tax and regulatory arbitrage, but that it was here that innovative forms of capital were produced and generalised which transcended the spaces and times of earlier institutional, transactional and jurisdictional concepts of capital and wealth.

KEYWORDS:

• financial innovation
• shadow banking
• taxation
• arbitrage
• derivatives
• securitisation

ACKNOWLEDGEMENTS

The authors would like to thank Ronen Palan for input to this paper, the editors of the special issue for careful guidance, and the reviewers for expert and constructive comment.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Nobel Laureate Myron Scholes and his colleague Mark Wolfson noted that tax arbitraged investments produced in shadow banking ‘…enable investors to postpone or eliminate permanently substantial sums of explicit taxes’ (1992, 405).

2. The Financial Stability Board (FSB) contends that the shadow banking system grew from $26 trillion in 2002 to $62 trillion in 2007 and $71 trillion in 2012. This represents 24% of total global financial intermediation, and it is growing rapidly. The sector grew by 8.1% over 2012 and an enormous 42% in China (FSB 2013, 2). The practices are geographically quite diverse, with the US home to 18% and the Euro area 16%, but the largest four countries make up just 43% of assets (FSB 2013, 9–10).

3. It has long been claimed that over-the-counter (OTC) derivative markets ‘turbo charged tax shelters’ (Sheppard 1999).

4 We are not short of spatial concepts and metaphors in this domain, from spaces of flows, fixity and motion, plateaus, action at a distance, and space-time compression (Castells 1996; Brenner 1998; Harvey 1990; Latour 1987; Deleuze and Guattari 1987). Sheppard (2002) provides a useful survey.

5. In a book specifically on finance and tax strategy, Scholes and Wolfson refer to this as the process of repackaging ownership rights so as to ‘…unbundle the components of investment returns and parse them out’ (1992, 409).

6. Desai claims that in the wake of this corporate decentring ‘…the archetypal multinational firm with a particular national identity and a corporate headquarters fixed in one country is becoming obsolete’ (2009, 1271)

7. According to the available data, the world runs a balance of payments deficit with itself. Undoubtedly, the interactions between financial innovation, the shadow banking system and the system of national accounts contribute to this. This deficit is also a proxy for fiscal incapacity.

8. The illustration draws directly from Eddins (2009) Tax Arbitrage Feedback Theory, which specifies the role of tax arbitrage in altering the spreads available on a given range of products and thereby incentivising investment in those markets and securities where those opportunities are most extenuated. This was in the credit default and securitisation markets and is a necessary component of any explanation of the GFC.

9. Myron Scholes (1997, 146–47) observed perspicaciously that standard debt and equity contracts are institutional arrangements or boxes. These institutional arrangements survive only because they provide lower cost solutions than competing alternative arrangements. Time will continue to blur the distinction between debt and equity.

10. Dool (2006) in an analysis of what he terms ‘pass through’ capital (such as the large international capital positions of the Netherlands, Caymans and Ireland) emphasises, ‘FDI figures may have nothing to do with the reporting economy’.

11. The leaked documents that detail these transactions can be located with a simple web search.

Additional information

Funding

Duncan Wigan's research was supported by the Systems of Tax Evasion and Laundering: Locating Global Wealth Chains in the International Political Economy (STEAL 2012–15) project funded by the Research Council of Norway's TaxCapDev [program no. 212210/H30]. Michael Rafferty's research was partly funded by the STEAL [project no. 212210/H30] and by the Australian Research Council [grant no. FF110100043]. Dick Bryan's research was partially funded by the Australian Research Council [grant no. DP120101437].

Notes on contributors

Dick Bryan

Dick Bryan is a professor in the Department of Political Economy at the University of Sydney.

Michael Rafferty

Michael Rafferty is a researcher in the Department of Business School at the University of Sydney.

Duncan Wigan

Duncan Wigan is an associate professor in the Department of Business and Politics, Copenhagen Business School.