What is the shadow banking system?

The shadow banking system is comprised of financial institutions which perform the same roles as traditional banks but which are subject to minimal, if any, regulation. Like traditional banks, shadow banks, such as hedge funds, provide credit and liquidity but they do not have access to central bank funding.

Where have you heard about the shadow banking system?

The term “shadow bank” was coined in a 2007 speech by economist Paul McCulley. Some economists such as Paul Krugman have said that a build-up of systemic risk and high levels of leverage in the shadow banking system were major causes of the financial crisis of 2008.

What you need to know about the shadow banking system.

It’s difficult to estimate the size of the shadow banking system is difficult because many of its entities don’t report to government regulators. The Financial Stability Board (FSB) conducted a global monitoring exercise in 2012 which estimated that the shadow banking system was valued at $67 trillion. In the U.S. the Dodd-Frank Act of 2010 attempted to regulate the shadow banking system by introducing provisions such as the direct oversight of systemically important financial institutions (SIPS) by the Federal Reserve. The FSB is also working towards direct regulation of the global shadow banking system.