Market Finance

In the generally received model of capitalism a bank opens the monetary circuit when the corporate sector decides to begin production. To simplify, the banking sector creates bank credit for corporations, wages are paid, goods and financial securities are purchased, until finally, corporations repay their debt and the circuit is closed.

Circuit Evolution

Endogenous money in market-based finance traces an anomalous monetary circuit. Credit organises around asset securities and derivatives markets. Shadow money is born as a repurchase (repo) transaction, as a sale of securities (the collateral) with the promise to buy back. Shadow money (brought into being to finance securities) is the debt of asset backed securities traders. Shadow money is the debt collateralised by the very securities that it finances.

Securities

To paraphrase professor of economics and macro-finance Daniela Gabor, "... Fiscal and monetary arms of the state must respond to changes in the financial system if they want to preserve capitalism (financial capitalism) in some form. Specifically, if shadow money created via repo is to preserve value - parity with traditional forms of money - during times of crisis then central banks must intervene in order to make these new promises-to-pay ."

A Simple Accounting Example

How might money balances, banking deposits, created ex-nihilo by a bank as loan origination, be converted into the money-like claims of a repurchase (repo) agreement?

This is a highly simplified summary accounting of how a lending bank may replace the deposit funding of its loanbook with repo funding - and in the process - destroy bank deposits in favour of the endogenous creation of repo deposits.

  1. Bank lends to the debtor household by issuing a loan, creating a deposit in the process.Step 1
  2. Debtor household spends the newly obtained deposit by purchasing an asset, transferring the deposit to the creditor.Step 2
  3. Not wishing to hold the deposit, the creditor household purchases a share in the Money Market Fund (MMF).Step 3
  4. The MMF has an excess of 'cash' and uses a repo to lend short-term to a dealer-broker - exchanges bank deposit for repo asset.Step 4
  5. Finally, dealer-broker lends to the bank through bilateral repo market. Allows the loan issuing bank to replace deposit funding with repo funding.Step 5
Asset ValueBank (Loan Issuing)HouseholdCreditorMoney Market FundDealers / BrokerSum
£500  (Individual / Corporation / Government)(Shadow Bank)(Shadow Bank) 
Step 1      
Loans (Asset)£500.00-£500.00000£0
Deposits (Credit (ex nihilo))-£500.00£500.00000£0
Step 2      
Loans£500.00-£500.00000£0
Deposits-£500.000£500.0000£0
Asset Value £500.00-£500.00  £0
Step 3      
Loans£500.00-£500.00000£0
Deposits-£500.0000£500.000£0
Asset Value £500.00-£500.00  £0
NAV Shares Value  £500.00-£500.00 £0
Step 4      
Loans£500.00-£500.00000£0
Deposits-£500.00000£500.00£0
Asset Value £500.00-£500.00  £0
NAV Shares Value  £500.00-£500.00 £0
Tri-Party Repo Asset   £500.00-£500.00£0
Step 5      
Loans£500.00-£500.00000£0
Deposits00000£0
Asset Value £500.00-£500.00  £0
NAV Shares Value  £500.00-£500.00 £0
Tri-Party Repo Asset   £500.00-£500.00£0
Bilateral Repo-£500.00   £500.00£0
Sum£0.00£0.00£0.00£0.00£0.00 

Market-based accounting is a spreadsheet interpretation of the 'off-balance sheet' description of a shadow banking monetary circuit created by Jo Michell, University of the West of England, Bristol (UWE).

Framework misunderstanding and spreadsheet accounting errors are the developer's responsibility alone.

View the reading.