Theorising non-bank financial intermediation

The expansion of non-bank financial intermediation (NBFI) presents a challenge for monetary theories which emphasise the macroeconomic significance of commercial bank lending. The heterodox literature which has emerged since the 2008 crisis falls roughly into two categories: a Post-Keynesian circuitist analysis and a political economy analysis influenced by Mehrling's 'money view'. Within this literature, debates on the importance and structure of monetary hierarchies, the determination of the unit of account, categorisation of instruments based on monetary functions, and the interaction between the state and the private sector reflect wider questions about how to theorise NBFI. This article argues that the participants of both sides of these debates insufficiently recognise the extent to which the so-called NBFI is integrated with the commercial banking system. Monetary theory has long recognised the significance of banking activities such as liability management, discounting of securities, and economising on settlement balances. Much NBFI can be understood as an extension of these commercial banking activities. Some areas of tension between theoretical approaches are then shown to reflect differences in emphasis rather than deeper divergence.