Shadow banking system

The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that provide services similar to traditional commercial banks but outside normal banking regulations. Examples of NBFIs include hedge funds, insurance firms, pawn shops, cashier's check issuers, check cashing locations, payday lending, currency exchanges, and microloan organizations. The phrase "shadow banking" is regarded by some as pejorative, and the term "market-based finance" has been proposed as an alternative. 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 factor in the subprime mortgage crisis of 2007–2008 and the global recession that followed. 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." Still, the meaning and scope of shadow banking are disputed in academic literature. According to Hervé Hannoun, deputy general manager of the Bank for International Settlements (BIS), investment banks and commercial banks may conduct much of their business in the shadow banking system (SBS) although most are not classified as SBS institutions themselves.

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