The Structure and the Evolution of the U.S. Financial System, 1945-1986: A Minskian Approach Explaining the Emergence of Shadow Banking

Abstract

The New Deal regulatory policies and institutions redesigned the U.S. financial structure and implicitly required the coordination between monetary policy and the regulatory framework; in that financial structure the Federal Reserve provided the reserves. The interest policy implicitly required the calibration and coordination of deposit ceiling rates and the prevailing market rate set by the Fed. However, the Treasury-Federal Reserve Accord of 1951 effectively dismantled the necessary coordination between monetary policy and the banking regulatory framework. The combination of interest rate differentials and reliance on markets as a liquidity provider triggered the creation of new financial instruments and institutions that changed the structure of the U.S. banking system. This policy encouraged the development of a financial system in which financial institutions seek to escape regulations. For instance, nonbank financial institutions escaped regulations and entered into the banking business model, getting both market share and profits of the regulated banking system. The New Deal constraints combined with innovation and competition between regulated and unregulated banks encouraged the emergence of shadow banks, as the latter were not subject to constraints.

Keywords: monetary policy, regulation, shadow banking, U.S. financial system

JEL Classification: E44, E50, E58, E60