The Monetary Circuit Theory, Financialisation and the Rise of the Non-Bank Financial Intermediaries

The last few decades have seen the ascendency of the so-called Non-Bank Financial Intermediaries (NBFIs). This paper maintains that the Monetary Circuit Theory offers a useful lens for interpreting this new banking system, namely the concepts of flux or creation of money, and of reflux or destruction of money. A more comprehensive interpretation of these concepts, extending beyond the original Monetary Circuit formulation of initial finance and final finance, facilitates a more nuanced analysis of the nature and functional roles of NBFIs in the workings of modern economies. The paper also adopts a functional classification of NBFIs proposed by the Financial Stability Board, which shows a noteworthy resemblance and consistency with the Monetary Circuit Theory. The main conclusion of the paper is that NBFIs do not create money, as commercial banks do, though as creditworthy borrowers, they have helped commercial banks to establish, directly or indirectly, new channels of creation of money. NBFIs have also amplified the ways existing money circulates into the system, before being used by borrowers to repay their original banks debts.