What is shadow banking

Shadow banking refers to the activities of financial intermediaries that operate outside the traditional banking system and are therefore not subject to the same regulatory oversight as traditional banks. These intermediaries provide services similar to those offered by banks, such as lending and borrowing, but do so through non-traditional means such as securitization, asset-backed commercial paper, and other complex financial instruments. Shadow banking entities include hedge funds, money market funds, structured investment vehicles, and other non-bank financial institutions. These entities can often operate with less capital and fewer regulatory constraints than traditional banks, allowing them to take on greater risk and potentially amplify the impact of financial crises. While shadow banking can provide important liquidity and credit to the financial system, it also poses potential risks to the stability of the overall financial system. The lack of oversight and transparency in shadow banking can lead to excessive risk-taking, interconnectedness between financial entities, and the potential for contagion during times of financial stress. In response to the 2008 financial crisis, regulators have taken steps to increase oversight of shadow banking activities and reduce systemic risks. However, the shadow banking sector continues to evolve and adapt, posing ongoing challenges for regulators and policymakers. As a result, the monitoring and regulation of shadow banking activities remain an important focus for financial authorities around the world.