What Is Shadow Banking?

The "shadow banking system" is a network of financial intermediaries that promote credit creation throughout the global financial system but are not subject to regulatory monitoring. These firms are frequently referred to as "nonbank financial institutions" (NBFCs). Unregulated actions by regulated organizations are often referred to as the "shadow banking system."

The shadow banking system is made up of lenders, brokers, and other credit intermediaries who operate outside of the traditional, regulated banking system.

What are some examples of shadow banking?

Many well-known corporations are classified as "shadow banks." Among these are:

• Investment banks (such as Goldman Sachs and Morgan Stanley)
• Mortgage lenders
• Money market funds
• Insurance and reinsurance companies

What are the advantages of shadow banking?

Shadow banking proponents believe that one advantage is that it decreases reliance on established banks as a source of lending. This is beneficial to the economy since it serves as an extra source of lending and diversifies the financial system.

Should Shadow Banking Be Regulated?

Many organizations, including the European Commission, believe they should. They claim that the shadow banking industry has to be regulated due to its scale (25–30%) of the entire financial system), tight ties to the regulated financial sector, and the systemic dangers it poses. They also argue that there is a need to prevent the shadow banking system from being utilized for regulatory arbitrage.

In summary

The shadow banking system is made up of lenders, brokers, and other credit intermediaries who operate outside of the standard, regulated banking system. Despite the fact that the phrase "shadow banking" sounds menacing, many well-known brokerages and financial organizations engage in shadow banking.

These companies' supporters believe that they provide crucial finance that is not available through regular banking channels. Opponents argue that the shadow banking industry poses an unchecked risk to consumers and the US economy's financial stability.