<p>Well, the ECB has given it <a href="https://www.bundesbank.de/resource/blob/622250/543c18dd179ac8882852fee86438909b/mL/2014-03-shadow-data.pdf" rel="nofollow noreferrer">[re]consideration</a>... by excluding repos from their M3 starting in August 2012.</p>

<blockquote>
  <p>From a
  monetary analysis perspective, it should be
  checked, then, whether any of the liabilities issued
  by the shadow banking system substitute
  traditional bank deposits – that is, whether
  they are comparable, say, with the bank deposits
  included in M3 in terms of their degree
  of liquidity and their risk characteristics.[footone: The extent to which these liabilities are used as money
  substitutes is subject to cyclical fluctuations and dependent
  on market developments.] If this
  is the case, increasing shadow banking activity
  would diminish the meaningfulness of monetary
  indicators, with the monetary aggregates
  needed for price determination in the goods
  market, in particular, being defined too narrowly.
  That is why, in an ever-evolving financial system,
  it is crucial to regularly review the definitions
  of monetary aggregates. At the launch of
  EMU, the Eurosystem decided that the group
  of monetary financial institutions (MFIs) designed
  to capture the money-issuing sector
  should include not just euro-area commercial
  banks but money market funds as well, the
  rationale
  for this move being that for investors,
  money market fund shares were close substitutes
  for bank deposits in terms of liquidity and
  therefore, much like bank deposits, were likely
  to be related to spending decisions.
  However, as monetary analysis is based on the
  consolidated balance sheet of the MFI sector,
  the concept of balance sheet identity dictates
  that a corresponding counterpart must be
  entered for each newly added monetary variable.
  So if the Eurosystem adds the liabilities
  side of money market funds’ balance sheets
  – that is, the issued money market fund shares –
  to the MFI sector’s consolidated balance sheet,
  it follows that the assets side of money market
  funds’ balance sheets likewise needs to be included.
  This was relatively straightforward for
  money market funds because they could be
  subjected to reporting requirements and their
  business activities essentially confined to receiving
  and investing fund assets (the latter primarily
  in short- term near-bank investments). [...]</p>
  
  <p>The increase in significance of the shadow
  banking system goes hand in hand with greater
  interaction between shadow banks and commercial
  banks. While an unconsolidated analysis
  of payment flows between the individual
  financial
  sector players is of interest from a
  financial
  stability perspective, monetary analysis
  seeks to adjust the monetary and credit aggregates
  affected by the interaction, if need be, so
  as to best capture the changes relevant to price
  developments.</p>
  
  <p>Repo and reverse repo transactions</p>
  
  <p>Secured money market transactions known as
  repo and reverse repo transactions, which
  commercial banks conclude with central counterparties
  (such as Eurex Clearing AG, which
  until recently was statistically classified as a
  non- bank financial intermediary), are examples
  of this. Repo transactions (reverse repo transactions transactions)
  were originally presented in the banking
  statistics – which are crucial for monetary
  analysis – as an outflow (inflow) of funds for
  the money- holding sector. <strong>Yet for the most
  part, these transactions inherently constitute
  secured money market transactions between
  commercial banks in which the central counterparty
  merely acts as a go-between. Consequently,
  the money supply is not expanded at
  the macroeconomic level. These secured transactions
  grew steadily in importance over the
  course of the financial and economic crisis
  owing to the high level of uncertainty in the
  interbank market. They ultimately had such a
  significant impact on short-term monetary and
  credit developments, both in terms of quantity
  and their month- on- month volatility (see the
  chart on page 27), that the Eurosystem decided
  to exclude them from the calculation of M3
  and its counterparts in August 2012.</strong></p>
  
  <p><a href="https://i.sstatic.net/HXzJk.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/HXzJk.png" alt="enter image description here"></a></p>
</blockquote>

<p>I don't know how the Fed deals with this. Like I said in a comment, the M-terms don't have universal definitions, when it comes to such details.</p>

<p>Note that the ECB has not excluded <em>all</em> the shadow banking from their M3 (not even all the repos), just the repos with "central counterparties".</p>

<blockquote>
  <p><a href="https://i.sstatic.net/JCNTV.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/JCNTV.png" alt="enter image description here"></a></p>
</blockquote>

CC BY-SA 4.0
2020-04-03T17:40:29.023Z
Hey, thank you for such a thorough answer. However, I don't understand the line, "Consequently, the money supply is not expanded at the macroeconomic level." -- How can that be? The lender is left with a deposit acct that affects their spending. And the borrower has actual cash. There is a new, cash-like liability being created?
David
CC BY-SA 4.0
2020-04-03T20:00:32.417Z
What on earth does this have to do with the question?
Frank
CC BY-SA 4.0
2020-04-03T20:10:44.883Z
@Frank: it has to do with the context in which repos are [or aren't] included in the monetary indicators. I thought that what the questions is about. Of course, the question is vague as it doesn't define "transaction-useful money".
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-03T20:51:59.697Z
Yeah well no I understand the question to be 'does a repo transaction create money'
Frank
CC BY-SA 4.0
2020-04-03T22:52:26.910Z
@DavisClute: I think what they mean by that is that when banks lend *to each other* via a repo arrangement (mediated by a 3rd party, which isn't even a bank), that doesn't increase the money that is lent to "mainstreet" businesses. This probably needs to be better documented with data; there's some wavelet analysis in that paper, but alas not on this issue, but on money markets having an effect on mainstreet.
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-04T01:21:33.640Z
@Fizz A bit confused, but was trying to follow your answer. So Repo increases the monetary supply (whether it's M3, etc) -- but it doesn't increase the amount of money in the "real" (mainstream) economy? Correct? If so, that seems like a weird (and hard to defend) distinction...
David
CC BY-SA 4.0
2020-04-04T01:23:50.723Z
@DavisClute: I think they mean that it depends who's doing repo with whom. The ECB decided that banks doing repos with each other (via some third party intermediary) doesn't inflate the money supply (as seen on mainstreet), but repos by others "still count" towards M3.
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-04T01:27:38.820Z
@Fizz Prima facie that sounds like an untenable argument (for a variety of reasons)...but this is exactly what I was looking for with my original question - so thank you :) -- To hit intellectual "rock bottom" on arguments about the endogeneity of money, especially vis-a-vis the shadow banking "system."
David
CC BY-SA 4.0
2020-04-04T01:37:36.723Z
@DavisClute: I was hoping to get/add some US perspective too, but according to Wikipedia "Since 2006, M3 is no longer published by the US central bank." That's not entirely accurate though, since I see the Fed [publishes](https://fred.stlouisfed.org/categories/28) an "Institutional Money Funds" indicator now. I'd have to read up what it includes and wha it doesn't.
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-03T11:25:51.757Z
2020-04-03T23:06:05.483Z
2020-04-03T23:06:05.483Z
fantastic peace and prosperity
<p>A repurchase agreement (“repo”) is used by investors to effectively borrow against their portfolio, which can then be used to finance other positions. </p>

<ul>
<li>For the “borrower,” it is the economic equivalent of a loan. A loan is a liability, and money is an asset.</li>
<li>For the “lender” it is a short-term asset. It can be an asset in a money market fund, and money market funds are considered part of broad money supply measures. (In some jurisdictions, you can write a cheque against such a fund, I believe. Not possible where I live.) As such, has a relationship to money.</li>
</ul>

<p>It should be noted that repos are included in M3 in the euro area, so they literally increase M3. <a href="https://www.ecb.europa.eu/stats/money_credit_banking/monetary_aggregates/html/index.en.html" rel="nofollow noreferrer">Link to ECB website.</a></p>

CC BY-SA 4.0
2020-04-02T22:04:37.620Z
Hey, I understand repo - a close friend worked on Repo desk at JPM. My question is: Is there net "new" money being produced by a repo agreement? It bears striking resemblance to normal deposit banking at Commercial bank. If you put your money into a Commercial bank, the "new" money being produced is the deposit account. I.e. M1 just increased.
David
CC BY-SA 4.0
2020-04-02T22:15:59.033Z
Put more clearly: Traditional regulated banking net adds to M1 (Its liability, your checking account, can be used in transactions). Repo is in M3. But, why? It's not because the liability is useful in transactions (like a checking acct). Is it because the collateral can be re-hypothecated?
David
CC BY-SA 4.0
2020-04-02T22:29:47.153Z
The cash provided by the lender can be used in settlement of intraday liabilities (the intraday liability is replaced with an overnight one that can typically be rolled), and more generally for financing assets.
dismalscience
CC BY-SA 4.0
2020-04-02T22:50:42.140Z
I understand that, and I 1000% understand what repo is, who uses it, its characteristics, etc. I'm just wondering if it creates NEW money in the system? (Like a commercial bank does - it creates M1 with checking accounts) -- It must create net new money, but what are its characteristics/nuances?
David
CC BY-SA 4.0
2020-04-02T22:59:41.600Z
So it’s more about the whole chain— a money fund does a repo against, say, an MBS held by a nonbank. The MBS is composed of mortgage loans... that whole chain is functionally equivalent to deposit funding of a mortgage portfolio by a bank.
dismalscience
CC BY-SA 4.0
2020-04-03T02:31:13.120Z
But it's not just maturity transformation, right? It must also create money...? (like its commercial counterparts do)
David
CC BY-SA 4.0
2020-04-03T12:10:17.330Z
It does create money. People on one end of the chain received money in the form of mortgage loans. People on the other end hold money in the form of demandable shares in money market funds. It creates money just as the lending out of deposits does.
dismalscience
CC BY-SA 4.0
2020-04-03T14:03:45.163Z
Repo “converts” a long-term bond (not considered money), into a money market instrument that can be used to back a money market fund (“broad money”). All else left equal, the broad money supply goes up.
Brian Romanchuk
CC BY-SA 4.0
2020-04-03T17:37:35.630Z
So, while I'd agree with both of you, read Fizz's answer below: "...Consequently, the money supply is not expanded at the macroeconomic level..." --- This selected quote is in the bolder part of his answer. I'll ask him.
David
CC BY-SA 4.0
2020-04-03T19:56:49.990Z
I updated the answer. It increases broad money, such as M3 in the euro area.
Brian Romanchuk
CC BY-SA 4.0
2020-04-03T20:50:33.897Z
The question was and remains 'does it create money'?. Not does it convert one money into broad money. So none of this chitchat is relevant.
Frank
CC BY-SA 4.0
2020-04-03T20:54:16.430Z
Not my downvote.... but have you found when the ECB changed their mind again? The info from my answer is from 2014, so it could well be out-of-date, given what you found. Or (more likely perhaps) they are including some repos but not others, and that's not reflected in the shorter summary you found? Actually, I'm going to ask that as a separate question, since this one is confusing enough with the idiosyncratic term "transaction-useful money", ahem.
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-03T21:14:51.373Z
@Frank - if the transaction raises M3, it “creates money”. It doesn’t create M1, but there’s a reason why broad monetary aggregates exist.
Brian Romanchuk
CC BY-SA 4.0
2020-04-03T21:15:56.830Z
@Fizz - in any event, money market funds are in M3. Repos are held by money market funds.
Brian Romanchuk
CC BY-SA 4.0
2020-04-03T21:17:52.463Z
I'm confused, you're basically saying that the ECB's M3 definition change made no difference? Or were they "double counting" these transactions before 2012? N.B. I've already asked https://economics.stackexchange.com/questions/35792/is-there-a-clear-timeline-of-ecb-eurosystems-changes-to-the-defintion-of-m3-wi so you can "get credit" for answering.
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-03T21:21:58.260Z
@Fizz: money market fund liabilities are in M3 (in all countries, I believe). Repos are on the asset side of their balance sheets. Even if you don’t want to directly include repos, they show up indirectly.
Brian Romanchuk
CC BY-SA 4.0
2020-04-04T01:39:23.477Z
As a final point, of course it's not simply MMF that does reverse repo. Temasek, Calpers, Berkshire, etc. Anyways, thank you all for this lively debate. I learned a lot.
David
CC BY-SA 4.0
2020-04-02T20:35:54.787Z
2020-04-03T19:56:06.483Z
2020-04-03T19:56:06.483Z
Brian Romanchuk
<p>I will add this as answer:</p>

<p>Your comment "If you put your money into a Commercial bank, the "new" money being produced is the deposit account." </p>

<p>That's not how banks increase the money supply. They increase the money supply when they issue a loan. They do not require reserves to do this. Even in times when reserve requirement is 10%, the banks can create, say a million dollars in new deposit accounts <em>and then</em> put 10% of those in the central bank. More accurately the rate of interbank spending is so high that by the time they have to settle with the central bank what gets parked there is from a mix of sources. They can park securities instead as reserve collateral, I belive. This is how it works and I have a number of links to prove it. Here is rich source of references <a href="https://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/" rel="nofollow noreferrer">https://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/</a> This myth that fractional reserve banking operations work by creating loans based on existing reserves, which are spent at another bank to create new deposits to create new loans, turning 10k into a million, is just that : a myth. Banks can issue as much new money as they deem healthy.</p>

<p>Someone putting 10Eur in a bank and getting deposit money in return isn't increasing the money supply. The bank would not spend its reserves, it would invest them, but today all banks need do is issue loans.</p>

<p>Repo is just a swap with an agreed future buyback. I don't see an analogy with the above debt creation process.</p>

CC BY-SA 4.0
2020-04-03T05:43:53.053Z
"as much new money as they deem healthy" and as capital requirement regulations allow them: https://economics.stackexchange.com/questions/27660/how-important-are-capital-requirements-for-controlling-broad-money-supply
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-03T06:04:46.730Z
@Fizz yep......
Frank
CC BY-SA 4.0
2020-04-03T17:45:46.677Z
@Frank I feel like you & I are going to debate this ad naseum. I see your point, but pedagogically I think it gives the wrong intuition - it leaves people thinking there is so mystical process going on. I get that banks can create M1 (deposit accts) as much as they want...I get that...
David
CC BY-SA 4.0
2020-04-03T20:56:18.083Z
@DavisClute in fact I really think you don't get it . How the hell does giving a bank your cash create money? Is that really what you think?
Frank
CC BY-SA 4.0
2020-04-04T01:16:31.690Z
@Frank I think you should take a step back to cool down. I come here for fun, light-hearted intellectual banter. Not vitrol.
David
CC BY-SA 4.0
2020-04-04T01:34:15.777Z
@Frank If you'd like, let's just go through the balance sheet of a REAL bank - JPM, Wells, Citi, etc. We're getting into distinctions so philosophically esoteric, that Jamie Dimon HIMSELF wouldn't even care. I feel like if we just analyzed a REAL balance sheet, it would help "orient" the conversation. I'm simply interested in pedagogical usefulness.
David
CC BY-SA 4.0
2020-04-04T17:49:07.227Z
@DavisClute Sorry, Davis. Wrote that last night when nodding off and heavily under the influence. Didn't even remember I wrote it. Will get back to economics chat some time in the coming days, but yes, absolutely, I ordinarily also come here for the same light hearted intellectual banter. No idea what got into me. Demon alcohol.
Frank
CC BY-SA 4.0
2020-04-03T05:00:08.597Z
2020-04-03T05:23:14.730Z
2020-04-03T05:23:14.730Z
Frank
<p>In shadow banking amongst primary dealers &amp; large institutions...I understand repurchase agreements function similar to deposit accounts (Gorton, et al). Additionally, I understand how traditional commercial banking produces M1 in the form of deposits, etc. </p>

<p>My question is: Where is the analogous money being created by shadow banks? I.e. I cannot use a Repo agreement in a transaction, unlike how I can use deposit accounts in commercial banks. Intuitively I feel money is being created, but not in the <em>exact</em> transaction-useful form as traditional banking. </p>

<p>Is the "money" being created effectively by virtue that the collateral can be rehypothecaed? </p>

<p>To paraphrase Jerry Maguire...<strong>Show me the transaction-useful money!</strong> </p>

CC BY-SA 4.0
2020-04-02T21:09:52.710Z
I don't understand the question. Are you talking about Fed repo operations as part of QE? In this case it's the fed producing the money and buying the security, but just allowing the bond to mature or otherwise ignoring the sell back (or reverse)
Frank
CC BY-SA 4.0
2020-04-02T22:08:01.543Z
Hey, ya maybe I didn't give enough context. So, Commercial Banks produce short-term debt (deposit accounts) which add net NEW money to M1, correct? Repo functions VERY similarly, but for the non-commercial banks (i.e. 'Shadow Banks') -- So my question is: Is there net "new" money being created by Repo? And is re-hypothecation of collateral somehow related to this "new" money? (Re-hypo == Using your posted collateral for my own purposes)
David
CC BY-SA 4.0
2020-04-03T05:09:54.140Z
Can you add a link to "Gorton, et al", or at least name the paper or define "transaction-useful money"? I get zero google hits for this term.
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-03T05:37:37.337Z
Also note that there's no standard definition for "M1" or all the M-terms for that matter. See https://en.wikipedia.org/wiki/Broad_money
fantastic peace and prosperity
CC BY-SA 4.0
2020-04-03T17:49:22.157Z
Well...1,000% precise definitions or not, it's clearly a colloquially useful framework to describe the "cash-likeness" of an asset. I feel like there is more than enough commonality to use the terms in an intellectual debate...
David
CC BY-SA 4.0
2020-04-03T17:51:59.887Z
"Transaction-useful" I just used for shorthand. My point was: if un-conventional/shadow banking produces money (like its commercial counterpart), is it useful in transactions? I'm not sure MMF claims or Repo agreements are. But does that mean it's "less" money-like if can't be used directly in a transaction?
David
<monetary-policy><banking><shadow-banking>
Does Shadow Banking (i.e. non-Commercial Banking) produce transaction-useful money?
David
# Does Shadow Banking (i.e. non-Commercial Banking) produce transaction-useful money?

(Asked by: username_0 on 2020-04-02)

In shadow banking amongst primary dealers & large institutions...I understand repurchase agreements function similar to deposit accounts (Gorton, et al). Additionally, I understand how traditional commercial banking produces M1 in the form of deposits, etc.

My question is: Where is the analogous money being created by shadow banks? I.e. I cannot use a Repo agreement in a transaction, unlike how I can use deposit accounts in commercial banks. Intuitively I feel money is being created, but not in the *exact* transaction-useful form as traditional banking.

Is the "money" being created effectively by virtue that the collateral can be rehypothecaed?

To paraphrase Jerry Maguire...**Show me the transaction-useful money!**

**Tags:** monetary-policy, banking, shadow-banking

> **Comments:**
> **username_1**: I don't understand the question. Are you talking about Fed repo operations as part of QE? In this case it's the fed producing the money and buying the security, but just allowing the bond to mature or otherwise ignoring the sell back (or reverse)  
> **username_0**: Hey, ya maybe I didn't give enough context. So, Commercial Banks produce short-term debt (deposit accounts) which add net NEW money to M1, correct? Repo functions VERY similarly, but for the non-commercial banks (i.e. 'Shadow Banks') -- So my question is: Is there net "new" money being created by Repo? And is re-hypothecation of collateral somehow related to this "new" money? (Re-hypo == Using your posted collateral for my own purposes)  
> **username_2**: Can you add a link to "Gorton, et al", or at least name the paper or define "transaction-useful money"? I get zero google hits for this term.  
> **username_2**: Also note that there's no standard definition for "M1" or all the M-terms for that matter. See https://en.wikipedia.org/wiki/Broad_money  
> **username_0**: Well...1,000% precise definitions or not, it's clearly a colloquially useful framework to describe the "cash-likeness" of an asset. I feel like there is more than enough commonality to use the terms in an intellectual debate...  
> **username_0**: "Transaction-useful" I just used for shorthand. My point was: if un-conventional/shadow banking produces money (like its commercial counterpart), is it useful in transactions? I'm not sure MMF claims or Repo agreements are. But does that mean it's "less" money-like if can't be used directly in a transaction?  

---

## 3 answers

### Answer by username_2 on 2020-04-03. Score: 0 | Accepted answer

Well, the ECB has given it [[re]consideration](https://www.bundesbank.de/resource/blob/622250/543c18dd179ac8882852fee86438909b/mL/2014-03-shadow-data.pdf)... by excluding repos from their M3 starting in August 2012.

> From a
> monetary analysis perspective, it should be
> checked, then, whether any of the liabilities issued
> by the shadow banking system substitute
> traditional bank deposits – that is, whether
> they are comparable, say, with the bank deposits
> included in M3 in terms of their degree
> of liquidity and their risk characteristics.[footone: The extent to which these liabilities are used as money
> substitutes is subject to cyclical fluctuations and dependent
> on market developments.] If this
> is the case, increasing shadow banking activity
> would diminish the meaningfulness of monetary
> indicators, with the monetary aggregates
> needed for price determination in the goods
> market, in particular, being defined too narrowly.
> That is why, in an ever-evolving financial system,
> it is crucial to regularly review the definitions
> of monetary aggregates. At the launch of
> EMU, the Eurosystem decided that the group
> of monetary financial institutions (MFIs) designed
> to capture the money-issuing sector
> should include not just euro-area commercial
> banks but money market funds as well, the
> rationale
> for this move being that for investors,
> money market fund shares were close substitutes
> for bank deposits in terms of liquidity and
> therefore, much like bank deposits, were likely
> to be related to spending decisions.
> However, as monetary analysis is based on the
> consolidated balance sheet of the MFI sector,
> the concept of balance sheet identity dictates
> that a corresponding counterpart must be
> entered for each newly added monetary variable.
> So if the Eurosystem adds the liabilities
> side of money market funds’ balance sheets
> – that is, the issued money market fund shares –
> to the MFI sector’s consolidated balance sheet,
> it follows that the assets side of money market
> funds’ balance sheets likewise needs to be included.
> This was relatively straightforward for
> money market funds because they could be
> subjected to reporting requirements and their
> business activities essentially confined to receiving
> and investing fund assets (the latter primarily
> in short- term near-bank investments). [...]
>
> The increase in significance of the shadow
> banking system goes hand in hand with greater
> interaction between shadow banks and commercial
> banks. While an unconsolidated analysis
> of payment flows between the individual
> financial
> sector players is of interest from a
> financial
> stability perspective, monetary analysis
> seeks to adjust the monetary and credit aggregates
> affected by the interaction, if need be, so
> as to best capture the changes relevant to price
> developments.
>
> Repo and reverse repo transactions
>
> Secured money market transactions known as
> repo and reverse repo transactions, which
> commercial banks conclude with central counterparties
> (such as Eurex Clearing AG, which
> until recently was statistically classified as a
> non- bank financial intermediary), are examples
> of this. Repo transactions (reverse repo transactions transactions)
> were originally presented in the banking
> statistics – which are crucial for monetary
> analysis – as an outflow (inflow) of funds for
> the money- holding sector. **Yet for the most
> part, these transactions inherently constitute
> secured money market transactions between
> commercial banks in which the central counterparty
> merely acts as a go-between. Consequently,
> the money supply is not expanded at
> the macroeconomic level. These secured transactions
> grew steadily in importance over the
> course of the financial and economic crisis
> owing to the high level of uncertainty in the
> interbank market. They ultimately had such a
> significant impact on short-term monetary and
> credit developments, both in terms of quantity
> and their month- on- month volatility (see the
> chart on page 27), that the Eurosystem decided
> to exclude them from the calculation of M3
> and its counterparts in August 2012.**
>
> [![enter image description here](https://i.sstatic.net/HXzJk.png)](https://i.sstatic.net/HXzJk.png)

I don't know how the Fed deals with this. Like I said in a comment, the M-terms don't have universal definitions, when it comes to such details.

Note that the ECB has not excluded *all* the shadow banking from their M3 (not even all the repos), just the repos with "central counterparties".

> [![enter image description here](https://i.sstatic.net/JCNTV.png)](https://i.sstatic.net/JCNTV.png)

> **Comments:**
> **username_0**: Hey, thank you for such a thorough answer. However, I don't understand the line, "Consequently, the money supply is not expanded at the macroeconomic level." -- How can that be? The lender is left with a deposit acct that affects their spending. And the borrower has actual cash. There is a new, cash-like liability being created?  
> **username_1**: What on earth does this have to do with the question?  
> **username_2**: @username_1: it has to do with the context in which repos are [or aren't] included in the monetary indicators. I thought that what the questions is about. Of course, the question is vague as it doesn't define "transaction-useful money".  
> **username_1**: Yeah well no I understand the question to be 'does a repo transaction create money'  
> **username_2**: @DavisClute: I think what they mean by that is that when banks lend *to each other* via a repo arrangement (mediated by a 3rd party, which isn't even a bank), that doesn't increase the money that is lent to "mainstreet" businesses. This probably needs to be better documented with data; there's some wavelet analysis in that paper, but alas not on this issue, but on money markets having an effect on mainstreet.  
> **username_0**: @Fizz A bit confused, but was trying to follow your answer. So Repo increases the monetary supply (whether it's M3, etc) -- but it doesn't increase the amount of money in the "real" (mainstream) economy? Correct? If so, that seems like a weird (and hard to defend) distinction...  
> **username_2**: @DavisClute: I think they mean that it depends who's doing repo with whom. The ECB decided that banks doing repos with each other (via some third party intermediary) doesn't inflate the money supply (as seen on mainstreet), but repos by others "still count" towards M3.  
> **username_0**: @Fizz Prima facie that sounds like an untenable argument (for a variety of reasons)...but this is exactly what I was looking for with my original question - so thank you :) -- To hit intellectual "rock bottom" on arguments about the endogeneity of money, especially vis-a-vis the shadow banking "system."  
> **username_2**: @DavisClute: I was hoping to get/add some US perspective too, but according to Wikipedia "Since 2006, M3 is no longer published by the US central bank." That's not entirely accurate though, since I see the Fed [publishes](https://fred.stlouisfed.org/categories/28) an "Institutional Money Funds" indicator now. I'd have to read up what it includes and wha it doesn't.  

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### Answer by username_3 on 2020-04-02. Score: 1

A repurchase agreement (“repo”) is used by investors to effectively borrow against their portfolio, which can then be used to finance other positions.

* For the “borrower,” it is the economic equivalent of a loan. A loan is a liability, and money is an asset.
* For the “lender” it is a short-term asset. It can be an asset in a money market fund, and money market funds are considered part of broad money supply measures. (In some jurisdictions, you can write a cheque against such a fund, I believe. Not possible where I live.) As such, has a relationship to money.

It should be noted that repos are included in M3 in the euro area, so they literally increase M3. [Link to ECB website.](https://www.ecb.europa.eu/stats/money_credit_banking/monetary_aggregates/html/index.en.html)

> **Comments:**
> **username_0**: Hey, I understand repo - a close friend worked on Repo desk at JPM. My question is: Is there net "new" money being produced by a repo agreement? It bears striking resemblance to normal deposit banking at Commercial bank. If you put your money into a Commercial bank, the "new" money being produced is the deposit account. I.e. M1 just increased.  
> **username_0**: Put more clearly: Traditional regulated banking net adds to M1 (Its liability, your checking account, can be used in transactions). Repo is in M3. But, why? It's not because the liability is useful in transactions (like a checking acct). Is it because the collateral can be re-hypothecated?  
> **username_4**: The cash provided by the lender can be used in settlement of intraday liabilities (the intraday liability is replaced with an overnight one that can typically be rolled), and more generally for financing assets.  
> **username_0**: I understand that, and I 1000% understand what repo is, who uses it, its characteristics, etc. I'm just wondering if it creates NEW money in the system? (Like a commercial bank does - it creates M1 with checking accounts) -- It must create net new money, but what are its characteristics/nuances?  
> **username_4**: So it’s more about the whole chain— a money fund does a repo against, say, an MBS held by a nonbank. The MBS is composed of mortgage loans... that whole chain is functionally equivalent to deposit funding of a mortgage portfolio by a bank.  
> **username_0**: But it's not just maturity transformation, right? It must also create money...? (like its commercial counterparts do)  
> **username_4**: It does create money. People on one end of the chain received money in the form of mortgage loans. People on the other end hold money in the form of demandable shares in money market funds. It creates money just as the lending out of deposits does.  
> **username_3**: Repo “converts” a long-term bond (not considered money), into a money market instrument that can be used to back a money market fund (“broad money”). All else left equal, the broad money supply goes up.  
> **username_0**: So, while I'd agree with both of you, read Fizz's answer below: "...Consequently, the money supply is not expanded at the macroeconomic level..." --- This selected quote is in the bolder part of his answer. I'll ask him.  
> **username_3**: I updated the answer. It increases broad money, such as M3 in the euro area.  
> **username_1**: The question was and remains 'does it create money'?. Not does it convert one money into broad money. So none of this chitchat is relevant.  
> **username_2**: Not my downvote.... but have you found when the ECB changed their mind again? The info from my answer is from 2014, so it could well be out-of-date, given what you found. Or (more likely perhaps) they are including some repos but not others, and that's not reflected in the shorter summary you found? Actually, I'm going to ask that as a separate question, since this one is confusing enough with the idiosyncratic term "transaction-useful money", ahem.  
> **username_3**: @username_1 - if the transaction raises M3, it “creates money”. It doesn’t create M1, but there’s a reason why broad monetary aggregates exist.  
> **username_3**: @Fizz - in any event, money market funds are in M3. Repos are held by money market funds.  
> **username_2**: I'm confused, you're basically saying that the ECB's M3 definition change made no difference? Or were they "double counting" these transactions before 2012? N.B. I've already asked https://economics.stackexchange.com/questions/35792/is-there-a-clear-timeline-of-ecb-eurosystems-changes-to-the-defintion-of-m3-wi so you can "get credit" for answering.  
> **username_3**: @Fizz: money market fund liabilities are in M3 (in all countries, I believe). Repos are on the asset side of their balance sheets. Even if you don’t want to directly include repos, they show up indirectly.  
> **username_0**: As a final point, of course it's not simply MMF that does reverse repo. Temasek, Calpers, Berkshire, etc. Anyways, thank you all for this lively debate. I learned a lot.  

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### Answer by username_1 on 2020-04-03. Score: 0

I will add this as answer:

Your comment "If you put your money into a Commercial bank, the "new" money being produced is the deposit account."

That's not how banks increase the money supply. They increase the money supply when they issue a loan. They do not require reserves to do this. Even in times when reserve requirement is 10%, the banks can create, say a million dollars in new deposit accounts *and then* put 10% of those in the central bank. More accurately the rate of interbank spending is so high that by the time they have to settle with the central bank what gets parked there is from a mix of sources. They can park securities instead as reserve collateral, I belive. This is how it works and I have a number of links to prove it. Here is rich source of references <https://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/> This myth that fractional reserve banking operations work by creating loans based on existing reserves, which are spent at another bank to create new deposits to create new loans, turning 10k into a million, is just that : a myth. Banks can issue as much new money as they deem healthy.

Someone putting 10Eur in a bank and getting deposit money in return isn't increasing the money supply. The bank would not spend its reserves, it would invest them, but today all banks need do is issue loans.

Repo is just a swap with an agreed future buyback. I don't see an analogy with the above debt creation process.

> **Comments:**
> **username_2**: "as much new money as they deem healthy" and as capital requirement regulations allow them: https://economics.stackexchange.com/questions/27660/how-important-are-capital-requirements-for-controlling-broad-money-supply  
> **username_1**: @Fizz yep......  
> **username_0**: @username_1 I feel like you & I are going to debate this ad naseum. I see your point, but pedagogically I think it gives the wrong intuition - it leaves people thinking there is so mystical process going on. I get that banks can create M1 (deposit accts) as much as they want...I get that...  
> **username_1**: @DavisClute in fact I really think you don't get it . How the hell does giving a bank your cash create money? Is that really what you think?  
> **username_0**: @username_1 I think you should take a step back to cool down. I come here for fun, light-hearted intellectual banter. Not vitrol.  
> **username_0**: @username_1 If you'd like, let's just go through the balance sheet of a REAL bank - JPM, Wells, Citi, etc. We're getting into distinctions so philosophically esoteric, that Jamie Dimon HIMSELF wouldn't even care. I feel like if we just analyzed a REAL balance sheet, it would help "orient" the conversation. I'm simply interested in pedagogical usefulness.  
> **username_1**: @DavisClute Sorry, Davis. Wrote that last night when nodding off and heavily under the influence. Didn't even remember I wrote it. Will get back to economics chat some time in the coming days, but yes, absolutely, I ordinarily also come here for the same light hearted intellectual banter. No idea what got into me. Demon alcohol.  

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