Shadow banking

The rapid growth of the market-based financial system since the mid-1980s has changed the nature of financial intermediation. Within the system, “shadow banks” have served a critical role, especially in the run-up to the recent financial crisis. Shadow banks are financial intermediaries that conduct maturity, credit, and liquidity transformation without explicit access to central bank liquidity or public sector credit guarantees. This article documents the institutional features of shadow banks, discusses the banks’ economic roles, and analyzes their relation to the traditional banking system. The authors argue that an understanding of the “plumbing” of the shadow banking system is an important underpinning for any study of financial system interlinkages. They observe that while many current and future reform efforts are focused on remediating the excesses of the recent credit bubble, increased capital and liquidity standards for depository institutions and insurance companies are likely to heighten the returns to shadow banking activity. Thus, shadow banking is expected to be a significant part of the financial system, although very likely in a different form, for the foreseeable future.