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Shadow Banking System

Shadow Banking System Definition

A system of non-financial institutions that borrow money in the short term and invest that money in long-term assets. These financial intermediaries are not subject to regulatory oversight. Shadow banking systems are able to avoid regulations through the use of credit derivatives. Examples of these are hedge funds, unlisted derivatives and other unlisted instruments.


Additional meaning of Shadow Banking System:

The shadow banking system also refers to unregulated activities carried out by regulated institutions (e.g. credit default swaps). Many of these institutions and instruments were able to employ credit and liquidity risks, and did not have capital requirements to cover those risks.

These are claimed to be one of the major problems leading to the subprime mortgage crisis in 2007-2008.


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