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All Hail Shadow Banking

Namely, that the time structure of the firm’s assets should be no longer than the time structure of its liabilities. Murray Rothbard, The Mystery of Banking, Chapter VII: Deposit Banking I begin with this cite of Rothbard. He points out one of the key destabilizing features of modern banking – the mismatch of the time structure of the banks’ assets and its liabilities. This mismatch has been allowed to exist and expand due to the monopoly nature of money and credit and the backing of central banks and governments. Bank liabilities are made up in good measure of short-term instruments – instantly demandable deposits being the shortest-term of all. Its assets are often of a longer duration – various types of loans and loan commitments of several years’ duration.

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