Shadow money and shadow banks in Brazil: A case of subordinated derisking

Abstract

Interest in money markets, particularly in repurchase agreements (repos) and their relationship to new financial agents, such as shadow banks, has found fertile ground in the theoretical approaches of Money View and Critical Macro Finance. They point out how regulatory, monetary, and fiscal policies derisk financial assets. However, this literature often homogenises the experience of peripheral countries, emphasising the role of foreign institutions. This article scrutinises the conditions and political implications for developing shadow money markets and shadow banks in Brazil. Despite subordination in international financial markets, Brazilian shadow banks have been immune to financial instability. It is argued that this stability is rooted in the state’s robust institutional capacity and effective public debt management, which counterbalances external vulnerability. The Brazilian state performs subordinated derisking by creating resilient markets through index-linked government bonds and restrictive monetary and fiscal policies, going beyond what the literature identifies as derisking in core economies. The reliance on subordinated derisking policies, catering to international and domestic capital, comes at the cost of high interest rates and debt service, resulting in a permanent transfer of public resources to private finance.