Abstract Contemporaneous banking theories appear to understand financial institutions as intermediaries, relegating bank money creation through money multiplication outside the core of banking activity. This article takes a different systemic perspective, pointing to the dynamic and collective features that generate a banking system within and across financial institutions. Classic features such as bank credit creation, as well as classic issues such as bank runs, are reconsidered under the notion of a ‘banking system’ requiring coordination over time and circumstances. Our conceptual framework develops a heuristic model of the basic mechanisms on which bank money creation lays upon. This model disentangles the link between functional and institutional dimensions of the money system, aiming to include minimal institutions in economic theory and economic analysis of money. These basic mechanisms include: monetary financial institutions (bank entities) issue claims which function as money; they facilitate payments across agents in the economy over time and space; they increase the money base through credit creation; they hold fractional reserves and lend to each other. Ongoing bank activity involves cash and non-cash (accrual) processes occurring within each bank entity and across them. Each bank keeps currency money in bank deposits on behalf of other agents. But the bank activity is further characterised by the capacity or privilege to use these deposits, although the latter remain available for payment and redemption at will and at par. Moreover, the bank can create deposit by granting a loan to, or buy a security from a borrower. This bank capacity or privilege involves money generation that enables the bank credit manufacturing process. In this way, all the banks become interdependent on the flow of payments that are performed across them, generating the ‘banking system’. Since each bank is structurally unbalanced due to money generation, inter-bank coordination is required to maintain the banking system in operation over time and circumstances. Both inter-bank clearing and credit arrangements provide this coordination at the inter-bank level, which is effectuated through central bank intervention, clearing houses and the money market. From this systemic perspective, ‘systemic risk’ and ‘macro-prudential’ management and regulation are new labels for recurrent concerns of systemic coordination. A careful combination of design and policy is therefore required to reach coordination in view to prevent or respond to local and systemic crises. Drawing upon this conceptual framework, this article develops institutional economic analysis and implications for shadow banking; systemic risk, interdependency and interconnectedness; the relationship between money and credit and the real economy; and the systemic consistency between functions and institutions in monetary regimes.
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