Shadow Banking: An Overview
What is Shadow Banking?
Shadow banking refers to the system of financial intermediaries and non-bank institutions that provide credit and liquidity outside the traditional banking system. Unlike conventional banks, shadow banks are not subject to full banking regulations, but they perform similar functions, such as lending, credit enhancement, and investment intermediation.
Shadow banking includes entities such as investment funds, money market funds, hedge funds, securitization vehicles, finance companies, and peer-to-peer lending platforms.
Key Functions of Shadow Banking
Credit Intermediation
Provides loans and financing to individuals, businesses, and institutions without being a traditional bank.
Includes non-bank lenders, private credit funds, and fintech lending platforms.
Securitization & Structured Finance
Pools assets (like mortgages or corporate loans) and converts them into tradable securities.
Helps free up capital for lenders and spreads risk to investors.
Liquidity & Market Access
Offers short-term funding and liquidity solutions through money market funds, repurchase agreements (repos), and asset-backed commercial paper.
Risk Transformation
Packages high-risk assets into securities that can be sold to investors with different risk appetites.