Market-Based Finance

In the generally received model of capitalism a bank opens the monetary circuit when the corporate sector decides to begin production. To simplify, the banking sector creates bank credit for corporations, wages are paid, goods and financial securities are purchased, until finally, corporations repay their debt and the circuit is closed.

Circuit Evolution

Endogenous money in market-based finance traces an anomalous monetary circuit. Credit organises around asset securities and derivatives markets. Shadow money is born as a repurchase (repo) transaction - as a sale of securities (the collateral) with the promise to buy back. Shadow money (brought into being to finance securities) is the debt of asset backed securities traders. Shadow money is the debt collateralised by the very securities that it finances.

Securities

To paraphrase, monetary economist Gary B. Gorton, "Almost all of human history can written in terms of the search for and production of different forms of safe assets." What constitutes a safe asset? A 'safe asset' is an asset that is (almost always) valued at face value without expensive and prolonged analysis. To paraphrase professor of economics and macro-finance Daniela Gabor, "An asset is not born, but becomes 'safe' in order to accommodate evolutionary changes in finance that require new safe assets." The prevailing global market-based financial system is constructed on the collateral of 'safe' asset securities. Market-based finance fundamentally alters the industrial capitalist monetary circuit.

Market-Based Accounting Example

How might money balances, banking deposits, created ex-nihilo by a bank as loan origination, be converted into the money-like claims of a repurchase (repo) agreement? This is a highly simplified summary accounting of how a lending bank may replace the deposit funding of its loanbook with repo funding - and in the process - destroy bank deposits in favour of the endogenous creation of repo deposits.

All transactors hold deposit accounts at the same bank

Step 1
Bank lends to the debtor household by issuing a loan, creating a deposit in the process.
Step 2
Debtor household spends the newly obtained deposit by purchasing an asset, transferring the deposit to the creditor.
Step 3
Not wishing to hold the deposit, the creditor household purchases a share in the Money Market Fund (MMF).
Step 4
The MMF has an excess of 'cash' and uses a repo to lend short-term to a dealer-broker - exchanges bank deposit for repo asset.
Step 5
Finally, dealer-broker lends to the bank through bilateral repo market. Allows the loan issuing bank to replace deposit funding with repo funding.

Start ValueBank (Loan Issuing)HouseholdCreditorMoney Market FundDealers / BrokerSum
£500  (Individual / Corporation / Government)(Shadow Bank)(Shadow Bank) 
Step 1      
Loans (Asset)£500.00-£500.00000£0
Deposits (Credit (ex nihilo))-£500.00£500.00000£0
Step 2      
Loans£500.00-£500.00000£0
Deposits-£500.000£500.0000£0
Asset Value £500.00-£500.00  £0
Step 3      
Loans£500.00-£500.00000£0
Deposits-£500.0000£500.000£0
Asset Value £500.00-£500.00  £0
NAV Shares Value  £500.00-£500.00 £0
Step 4      
Loans£500.00-£500.00000£0
Deposits-£500.00000£500.00£0
Asset Value £500.00-£500.00  £0
NAV Shares Value  £500.00-£500.00 £0
Tri-Party Repo Asset   £500.00-£500.00£0
Step 5      
Loans£500.00-£500.00000£0
Deposits00000£0
Asset Value £500.00-£500.00  £0
NAV Shares Value  £500.00-£500.00 £0
Tri-Party Repo Asset   £500.00-£500.00£0
Bilateral Repo-£500.00   £500.00£0
Sum£0.00£0.00£0.00£0.00£0.00 

Market-based accounting is actually a spreadsheet entry interpretation of the 'off-balance sheet' description of a shadow banking monetary circuit created by Jo Michell, University of the West of England, Bristol (UWE).

Michell, Jo. (May 1, 2017). Do Shadow Banks Create Money? 'Financialisation' and the Monetary Circuit. Metroeconomica, Volume 68, Issue 2, Pages 354-377. doi: 10.1111/meca.12149.

Framework misunderstanding and spreadsheet accounting errors are the developer's responsibility alone.