The Conventional Wisdom on the Rise of Shadow Banking and the Neglect of Financial Stability Concerns: Strengths and Weaknesses

This introductory lecture lays out the main object of study of the lecture series, the shadow banking system, its wider importance for the understanding of the contemporary political economy, and the dominant explanations for its rise as well as its positive and detrimental effects. The shadow banking system – the generation and trading of credit outside of the banking system, financed with short-term deposits – and its rise after WWII, is identified in the contemporary literature as a major factor in the process of financialization that unfolded from the 1970s and in the diffusion and impact of the Transatlantic Financial Crisis as it unfolded from 2007. As such, it is closely linked to the central banks’ rise to the heights of macroeconomic policy and the credit-based growth model associated with it that dominates the US.

With respect to the rise of shadow banking, the conventional wisdom maintains that an unruly elite group of the capitalist class engaged in regulatory arbitrage to circumvent the rules established after WWII to constrain finance, an activity that was condoned by the US and the UK. Yet, this image of duped public officials who are behind the curve and come to approve of financial innovations post-factum, often after a crisis, has several weaknesses. On the one hand, it portrays the state as a monolithic actor, rather than a set of distributed agents with contradictory interests, including the Treasury and the Central Bank; on the other, it ignores the potential proactive agency of actors within the state apparatus which was laying the foundations of the shadow banking system. With respect to the fallout after the crisis, the conventional wisdom overplays the degree of ignorance and underplays the degree of dependence of central banks, both factors that limit the system’s regulation.

Matthias Thiemann is Professor of European Public Policy at the Center for European Studies and Comparative Politics, Sciences Po, Paris, and the MPIfG Scholar in Residence 2025. During his stay at the Institute, he presents a lecture series entitled "Technocrats, State Agency, and the Rise and Continued Expansion of the Shadow Banking System." The three lectures will take place on April 29, May 6, and May 13, 2025.

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