Shadow banking system

The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal financial regulations.

This definition was first put forward by PIMCO (Pacific Investment Management COmpany) executive director Paul McCulley at FED (Federal Reserve System) annual meeting in 2007.

Former US Federal Reserve Chair Ben Bernanke provided the following definition in November 2013:

"Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions — but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper [ABCP] conduits, money market funds, markets for repurchase agreements, investment banks, and mortgage companies"

Shadow banking has grown in importance to rival traditional depository banking, and was a primary factor in the subprime mortgage crisis of 2007-2008 and the global recession that followed. Valerio Lemma, an associate professor of Banking Law who consults on regulatory compliance, argues that the lack of regulatory supervision of the shadow banking system is a market failure.

Paul McCulley of investment management firm PIMCO coined the term "shadow banking". Shadow banking is sometimes said to include entities such as hedge funds, money market funds, structured investment vehicles (SIV), "credit investment funds, exchange-traded funds, credit hedge funds, private equity funds, securities broker dealers, credit insurance providers, securitization and finance companies" but the meaning and scope of shadow banking is disputed in academic literature.

...
Wikipedia