Principal Investigator:

Professor Daniela Gabor

Daniela Gabor is Professor in Economics and Macro-Finance at the University of the West of England (UWE), and obtained a PhD in Banking and Finance in 2009 from the University of Stirling.

Her  research develops three related themes under the umbrella of critical macro finance. First, shadow banking activities, in particular repo markets, and the implications for monetary theory, central banking, sovereign bond markets and regulatory activity. Second, my research develops the theme of transnational banks’ involvement in policy deliberations around capital controls and crisis management in both global settings and in emerging markets. Finally, I research the IMF’s conditionality and advice on capital controls.

Co-Investigators: Yannis Dafermos (UWE Bristol) and Jo Michell (UWE Bristol)



Ten years since the collapse of Lehman Brothers, concerns remain about the potential for shadow banking activity to cause instability. While regulation is tighter, it is far from certain that fresh crises have been rendered impossible.

The successful design of policies to tame financial instability requires a new understanding of the shadow banking system. Rather than a source of unforeseen shocks, shadow banking must be understood as part of a broader process of evolutionary institutional change driven by global macroeconomic and political forces.

Following Hyman Minsky, we refer to this process as a supercycle. Supercycles are characterised by the creation and erosion of what Minsky called thwarting mechanisms. These are customs, institutions or policies that exert a stabilising influence. These include labour market institutions, macroeconomic demand management tools, financial regulation, and crisis management tools such as the central bank lender of last resort.

These mechanisms dampen the business cycle, preventing crises from spiralling out of control and recessions turning into depressions. But profit-seeking agents adapt to thwarting mechanisms and seek to maintain profitability through institutional change, weakening these safeguards. Once thwarting mechanisms are substantially eroded, economic instability is no longer constrained and a deep crisis occurs, as in 2008. These crises mark the boundary between supercycles: as the economy recovers, new thwarting mechanisms will be imposed, triggering fresh institutional change.

Shadow banking is one recent manifestation of this process of evolutionary institutional development. The emergence of bank-like financial institutions outside of the usual regulatory system was, at least in part, a profit-seeking response to the imposition of rules intended at preventing instability. Goodhart refers to this as the boundary problem: attempted regulation of financial institutions introduces incentives to move outside of the regulatory boundary. As well as evasion of regulation, shadow banking may also transform mechanisms that were previously stabilising into new sources of instability. To paraphase Minsky, attempts at stabilisation may prove destabilising.

This project uses Minsky’s ideas about supercycles and thwarting mechanisms as the starting point to develop a new interdisciplinary framework for the analysis of shadow banking. We will analyse the interactions between shadow banking and both global and national thwarting mechanisms, using case studies of several important episodes, including the emergence of securitisation by the US government-sponsored agencies, the 1984 bailout of Continental Illinois, the 1998 collapse of LTCM, and the 2008 global financial crisis.

Institutional mechanisms aimed at the prevention of instability require continuous updating. We will identify how policy can constrain financial institutions in their attempts to evade regulation and erode thwarting mechanisms. Our research will also cast light on the relationship between developing and emerging markets economies: mechanisms that increase stability in developed markets (such as quantitative easing) may contribute to instability in emerging markets.

The insights from this project will be of obvious interest to policy makers. Our fresh understanding of the evolution of shadow banking will lead to radically new directions for the implementation of policies to curtail instability and prevent future crises.


Results will be published here when available.