Shadow Banking System

AAA

DEFINITION of 'Shadow Banking System'

The financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.

INVESTOPEDIA EXPLAINS 'Shadow Banking System'

Examples of intermediaries not subject to regulation include hedge funds, unlisted derivatives and other unlisted instruments. Examples of unregulated activities by regulated institutions include credit default swaps.


The shadow banking system has escaped regulation primarily because it did not accept traditional bank deposits. As a result, many of the institutions and instruments were able to employ higher market, credit and liquidity risks, and did not have capital requirements commensurate with those risks. Subsequent to the subprime meltdown in 2008, the activities of the shadow banking system came under increasing scrutiny and regulations.

RELATED TERMS
  1. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default ...
  2. Volcker Rule

    The Volcker rule separates investment banking, private equity ...
  3. Bank Reserve

    Bank reserves are the currency deposits which are not lent out ...
  4. Tax Accounting

    Accounting methods that focus on taxes rather than the appearance ...
  5. Credit Default Swap - CDS

    A swap designed to transfer the credit exposure of fixed income ...
  6. Hedge Fund

    An aggressively managed portfolio of investments that uses advanced ...
Related Articles
  1. Dissecting The Bear Stearns Hedge Fund ...
    Insurance

    Dissecting The Bear Stearns Hedge Fund ...

  2. The Rise And Fall Of The Shadow Banking ...
    Personal Finance

    The Rise And Fall Of The Shadow Banking ...

  3. Are Derivatives A Disaster Waiting To ...
    Options & Futures

    Are Derivatives A Disaster Waiting To ...

  4. Massive Hedge Fund Failures
    Options & Futures

    Massive Hedge Fund Failures

comments powered by Disqus
Hot Definitions
  1. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  2. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  3. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  4. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  5. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
  6. Limit-On-Open Order - LOO

    A type of limit order to buy or sell shares at the market open if the market price meets the limit condition. This type of ...
Trading Center