Shadow Banking in Keynes’s Writings: Banking Exposure, Collateral Runs and Liquidity

This paper reviews the literature on the conceptualization of shadow banking and uses it to analyse Keynes’ views on the interaction between money markets and banking systems. I revise both theoretical approaches (such as those present in the Treatise on Money and The General Theory) and empirical analyses of specific crises (such as the beginning of the First World War and the 1929 Crash). I argue that Keynes displayed a clear understanding of the main features of contemporaries features and challenges of shadow banking. In particular, I explore three connected dimensions: the interrelations between the banking and the non-banking financial system; the possibility of collateral runs; and the pressure to conform to liquidity conventions.