Shadow Banking

Shadow banking institutions perform bank-like functions, such as lending, providing credit and transforming short-term funding into longer-term investments, without being regulated as banks. They usually do not take insured deposits and do not have direct access to central bank emergency lending.

The term became prominent during the 2008 financial crisis, when problems in parts of this system, such as investment vehicles funded by short-term borrowing and certain money market funds, contributed to the turmoil. International regulators now usually call it non-bank financial intermediation.

For example, a private credit fund that lends directly to companies, funded by investors rather than deposits, performs a lending role traditionally carried out by banks.

Non-bank finance can provide useful competition and diversify sources of credit. But it can also create risks, especially when institutions rely on short-term funding that can disappear in a crisis, or use high leverage. Regulators have increased monitoring of this sector, which has grown to represent a large share of global financial assets.