Shadow banking system

The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that legally provide services similar to traditional commercial banks but outside normal banking regulations. S&P Global estimates that, at end-2022, shadow banking held about $63 trillion in financial assets in major jurisdictions around the world, representing 78% of global GDP, up from $28 trillion and 68% of global GDP in 2009.

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"

Importance

Many "shadow bank"-like institutions and vehicles have emerged in American and European markets, between the years 2000 and 2008, and have come to play an important role in providing credit across the global financial system.

In a June 2008 speech, Timothy Geithner, then president and CEO of the Federal Reserve Bank of New York, described the growing importance of what he called the "non-bank financial system": "In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion. Assets financed overnight in triparty repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion."

In 2016, Benoît Cœuré (ECB executive board member) stated that controlling shadow banking should be the focus to avoid a future financial crisis, since the banks' leverage had been lowered.

S&P Global estimates that, at end-2022, shadow banking held about $63 trillion in financial assets in major global jurisdictions, representing 78% of global GDP, up from $28 trillion and 68% of global GDP in 2009.