The comparative advantage of the U.S. shadow banking system and the role of the U.S. dollar

Abstract

What facilitated European banks to expand their balance sheets denominated in the US dollar across the Atlantic through U.S. shadow banking system in the 2000s, despite the creation of the euro in 1999? In order to the question, this article argues that the European banks’ balance sheets denominated in the dollar depended on the comparative advantage of the U.S. shadow banking system over one in the Eurozone in term of financial market side institutional side, resulting in the U.S. dollar reign in the shadow banking system in the 2000s. In conclusion, as far as the dominant position of the dollar in the shadow banking system, the U.S. dollar standard system has been as asymmetric as ever in the 2000s, rather than less asymmetric.

Notes

Acknowledgments

I would like to thank Gerald Epstein and Takuyoshi Takada for helpful and constructive comments on an earlier draft. The core argument of this article was presented at the Union of Radical Political Economy (URPE) 50th Anniversary Conference & Celebration on September 2018 at the University of Massachusetts, Amherst. I am grateful for the useful comments by participants. I would also like to thank two referees and the editor for helpful comments. All remaining errors are my responsibility.

Notes

1 Maes (2015) pointed out that the expansion of USD-denominated balance sheets at European banks in the 2000s seems to outpace any reasonable growth based on standard views about the choice of international currency.

2 In addition to U.S. debt securities, collateral was widened to include foreign paper when the Basel Committee loosened its capital requirements for repos in July 2005. This regulatory change enabled foreign banks to participate in U.S. repo market (Bayoumi 2017/2018: 75)

3 Kindleberger (1978/2005) described the long history of the international lender of last resort.

4 The former presidents of the ECB, Duisenberg and Trichet, stressed that the ECB will not act as a role of the LLR (see Pollard 2003: 19; Barber and Atkins 2011)

5 De Grauwe (2013) insisted that the ECB should play a role of the lender of last resort in government bond markets of the monetary union.

6 The Greenspan put is based on the experience of deflation in Japan in the 1990s. (Greenspan 2007)

7 The mechanism was also explored in detail by Adrian and Shin (2010), the Committee on the Global Financial System (2011), Cömert (2013), and the European Systemic Risk Board (2014).

8 Most of the material in this section draws on Tokunaga and Epstein (2018).

9 Cohen (2011) suggested that the multicurrency system in the 2000s, consisting of the dollar and the euro, can be regarded as “a one-and-a-half” global monetary system.