Embedded finance: the shadow banking system, sovereign power, and a new state–market hybridity

ABSTRACT

With the rise of the shadow banking system, a new form of state–market hybridity has emerged, challenging existing monetary approaches to financial stability. A stable financial system today has essentially come to depend on a stable shadow banking system. Central banks are in the process of adapting to this new development. To secure the logic of laissez-faire market liberalism, the sovereign must resort to unprecedented measures and radically intervene in the financial markets. This new form of state–market hybridity forces central banks to provide ample reserves, to act as a dealer of last resort, and to give shadow banking actors access to their balance sheets. Such policies, however, produce new contradictions and fragilities. Based on Foucault's concepts of sovereignty and security, this paper argues that in today's world, the rationality of the laissez-faire security dispositif has become flanked by the rationality of sovereignty to a much greater extent than previously. Without losing its dominant status, the security dispositif is currently adapting so as to operate in crisis mode based on a post-laissez-faire rationality. The repo crisis of 2019 has demonstrated that central banks are still in the process of searching for ways to handle this new constellation.

KEYWORDS:

• central banks
• monetary politics
• financial crisis
• shadow banking
• state–market relation

Acknowledgments

I would like to thank the members of the politics of money network of the German Research Foundation (DFG) for the many interesting discussions. Special thanks to Daniela Gabor, Nina Boy, and Andreas Langenohl for their very helpful comments to former versions of the paper. My sincere gratitude also goes to the reviewers who provided me with many really helpful comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes on contributor

Joscha Wullweber is a visiting professor of Political Economy and Global Governance at the Faculty of Economics, University of Witten/Herdecke, Germany. His recent publications include: 2020. The Politics of Shadow Money: Security Structures, Money Creation and Unconventional Central Banking. New Political Economy, DOI: 10.1080/13563467.2019.1708878; 2019. Money, State, Hegemony: A political ontology of money. New Political Science, 41 (2); 2019. Monism vs. pluralism, the global financial crisis, and the methodological struggle in the field of International Political Economy. Competition and Change, 23 (3), 287–311; 2019. Constructing hegemony in global politics. A discourse-theoretical approach to policy analysis. Administrative Theory and Praxis, 47 (3), 148–167.

Notes

1 Although officially central banks are independent of the government, they still remain a state institution and an expression of sovereign power (Ingham 2004; Krippner 2007; Mehrling et al. 2013).

2 For an excellent analysis of the Fed's monetary policies prior to 2007, see Krippner (2007).

3 The following analysis focuses on the hybrid relation between the Fed and the (U.S.) financial markets, especially the money market and the capital market.

4 Non-bank financial actors still do not have reserve accounts, but they can trade more or less directly with the Fed via clearing houses (Pozsar 2019).

5 The Bank of England included the measure among its aims and objectives in its 2015 annual report, the ‘Sterling Monetary Framework’ (‘Red Book’), becoming the first central bank to formalize the approach (Bank of England 2015).