Banking upside down: the implicit politics of shadow banking expertise

Abstract

ABSTRACTWhat is shadow banking and what is political about it? To address these questions, the paper first unpacks the mechanics of shadow banking and compares them to traditional banking. Based on this stylized explanation, it problematizes the use of the term ‘banking’. Indeed, shadow banks turn long-term liabilities into short-term financial instruments, effectively turning traditional banking on its head. Next, it draws on three political science frameworks to bring to the fore and develop the political content of mainstream economic expertise on shadow banks. First, it shows that shadow banks played a significant role in the rent-seeking behavior of the financial sector by extracting regulatory rents and subsidies. Second, in spite of this, the extension of public backstops to shadow banks has largely been treated as logical institutional adaptation to a changing financial landscape. Third, shadow banking emerged alongside and contributed to growing economic inequality. It did so by acting as a credit bridge between giant pools of money seeking returns and a growing number of borrowers, raising further questions about its economic and social utility. These findings contribute to the emerging political economy literature on shadow banking, expert ideas and the relationship between finance and larger societal developments.