Shadow banking - Financial definition
Concise definition of the term shadow banking
Term designing a system of credit intermediation that involves entities and activities outside the regular banking system.
Comprehensive definition of the term shadow banking
These entities, called shadow banks do not fall under the banking regulations, although the operations they conduct are often similar to those of banks:
- Taking in of funds similar to deposits
- Lending over long periods and taking in of deposits that are available immediately (known as maturity and/or liquidity transformation)
- Taking on of the risk of the borrower not being able to repay
- Use of borrowed money, directly or indirectly, to buy other assets
Shadow banking also includes activities, in particular, securitization, securities lending, and repurchase transactions, which constitute an important source of financing for financial entities.
Shadow banking entities may include for example:
- securitization vehicles or conduits
- money market funds
- investment funds that provide credit or are leveraged, such as certain hedge funds or private equity funds
- financial entities that provide credit or credit guarantees, which are not regulated like banks
- certain insurance or reinsurance undertakings that issue or guarantee credit products.
Shadow banking activities can be helpful since they ensure diversification of financing sources for the economy but needs to be subject to appropriate regulation and transparency requirements.